Unless you’re a tax pro like me (who lives and breathes this stuff), you want to think about taxes as little as possible. Especially post-tax deadlines.
Out of sight, out of mind until next year, right?
If you’re a local McMinnville business owner or have a gig economy hustle, you’ve got to make sure taxes are something you’re paying attention to… and regularly.
The pay-as-you-go position of the IRS is actually an advantage of the tax system… but it’s also a REQUIREMENT for businesses. You’re bringing in money, and according to the IRS, you’re required to pay them their share of that money in regularly scheduled increments… aka estimated tax payments (something you’re most likely familiar with).
Even if a million things are vying for your attention, if you don’t plan to get them taken care of throughout the year it’s gonna cause you major headaches down the road, and you’ll lose money in the process.
If that’s the scenario you find yourself in, don’t freak out; there are things we can do to get you back on track and set up for success. (Disclaimer: We are talking about federal taxes today. Don’t forget that state taxes are also a thing.)
And if you are a freelancer who works for yourself — you’ll want to pay attention to this, too.
Estimated tax payments: the CliffsNotes
Let’s review it real quick: Your employer typically submits these taxes to the IRS on your behalf (this money is deducted from your pay). But if you are self-employed, a partner, or an S corporation shareholder, you do that part yourself — that is, if you expect to owe at least a thousand in taxes. This rule also applies to corporations expecting to owe at least five hundred.
Estimated tax payments are broken down into quarters. Here are the deadlines for 2023, as an example:
- January 1 – March 31. Payment due April 18.
- April 1 – May 31. Payment due June 15.
- June 1 – Aug 31. Payment due September 15.
- September 1 – December 31. Payment due January 16, 2024.
This quarterly system actually works in your favor sometimes. For starters, it spreads out the amount due into more manageable chunks. It also gives you better insight into your tax obligations, because you (or your Yamhill County accountant) have to know how much to pay each quarter. Think of it like the IRS’s own pay-as-you-go situation.
But today, I want to focus on what happens when you miss the deadlines… because it happens. And this is where things get more interesting (albeit less fun).
The price you pay (literally) for being tardy
Technically, you can wait and send one payment when you file tax returns at the very end of the year… but you shouldn’t. That’s how you end up with penalties, which are basically interest charges. Each quarter, the IRS sets the rate at 2–5 percentage points more than the federal short-term rate (currently 6.38%), depending on your situation as an individual or business.
Practically, that means you’re looking at an interest rate between 8-11% for 2023.
That’s a lot of money that could be going toward employee bonuses, office supplies, or paying off a loan — instead of interest payments at the end of the year.
And because estimated tax payments are strictly organized by quarter, you can fully pay off (or even have overpaid) your taxes by the end of the year, but if you skipped a quarterly payment or two… there will still be penalties regarding those quarters.
Penalties are affected by how much you owe and how late the payment is, so you want to catch up as soon as you can if you fall behind. It’s easy to look at the next deadline and hope to catch up then, but it is more favorable for you to pay off any balance due as soon as possible. And always pay as much as you can on a payment, even if you can’t pay it all by the deadline. (Remember, the amount of your outstanding balance affects the penalty amount.)
Exceptions to the rule
Now, you might be able to skip a payment if you overpaid in the previous quarter or will earn less than a thousand dollars (five hundred for corporations)… but these things get tricky, so ask us about that before banking on it.
There are some more regular exceptions, that could waive your penalties. These include if you:
- Owe less than 1K in tax after subtracting withholdings and credits
- Paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year — whichever amount is smaller
- Are the victim of a disaster
- Are at least 62 years old and became retired or disabled recently.
Pro tip: If your income fluctuates a lot throughout the year, annualizing your income and making unequal payments is another possible way to avoid penalties next time.
You can even apply to get part (or all) of a penalty waived. I don’t recommend wading through this mess without guidance from a trusted McMinnville professional who knows the tax code like the back of their hand — which is exactly why we are here for you. 😉
If you find yourself behind on making those estimated tax payments or stuck with penalties for not taking care of them in a timely way, grab a spot on the calendar here:
We can talk it through and make a plan for you.
Here’s to a headache-free future,