Tax Planning

Self-employment offers flexibility, independence and the potential for unlimited earnings, but it also comes with important financial responsibilities—one of the most significant being taxes, as your CPA can attest to. Unlike traditional employees who have taxes withheld from their paychecks, self-employed individuals must handle their own tax obligations, including making estimated tax payments throughout the year. Failing to do so can lead to underpayment penalties, interest charges, and financial stress when tax season arrives. Understanding how estimated taxes work, how to calculate them, and when to pay them is essential for staying compliant with IRS rules and avoiding unnecessary costs.

What Are Estimated Taxes?

Estimated taxes are payments made to the IRS on a quarterly basis. These payments cover income tax and self-employment tax, which includes Social Security and Medicare contributions. Since self-employed individuals do not have taxes automatically withheld from their earnings, they must estimate their tax liability and make payments to the IRS throughout the year. The purpose of estimated taxes is to ensure that individuals prepay a sufficient amount of their tax liability rather than waiting until tax season, when a large bill could come due.

Generally, self-employed individuals, freelancers, independent contractors and business owners who expect to owe at least $1,000 in taxes after subtracting any withholding or credits must make estimated tax payments. This applies to income from various sources, including contract work, small business earnings, rental properties, and investments. Even individuals with side businesses or gig work may need to pay estimated taxes if their earnings push their tax liability over the threshold.

Calculating Estimated Tax Payments

To determine how much to pay in estimated taxes, self-employed individuals must first estimate their total taxable income for the year, taking into account business expenses, deductions, and any available tax credits. The IRS provides Form 1040-ES, which includes a worksheet to help calculate estimated taxes. The key components of this calculation include:

• Income tax - Based on the expected taxable income after deductions.

• Self-employment tax - This tax covers Social Security and Medicare contributions, amounting to 15.3% of net earnings—12.4% for Social Security and 2.9% for Medicare.

• Other applicable taxes - Some individuals may owe additional taxes, such as the Net Investment Income Tax.

Because self-employment income can fluctuate throughout the year, it’s advisable to reassess estimated tax calculations regularly. If income increases or decreases significantly, adjustments to estimated payments may be necessary to avoid overpaying or underpaying. Your CPA can help with this.

When and How to Pay Estimated Taxes

The IRS requires estimated taxes to be paid in four installments throughout the year. The typical due dates for these payments are:

• April 15, covering income earned from January 1 to March 31

• June 15, covering income earned from April 1 to May 31

• September 15, covering income earned from June 1 to August 31

• January 15 of the following year, covering income earned from September 1 to December 31

If the due date falls on a weekend or holiday, the deadline is extended to the next business day. Missing these deadlines can result in penalties and interest charges, so it is crucial to track them carefully.

Estimated tax payments can be made in several ways. The easiest is to have your CPA take care of it.

Avoiding Underpayment Penalties

Failing to pay estimated taxes or underpaying throughout the year can result in IRS penalties, which are calculated based on the amount underpaid and the length of time it remains unpaid. To avoid penalties, individuals should:

• Make timely and accurate quarterly payments rather than waiting to make a lump sum payment at year-end.

• Use the safe harbor rule to ensure they pay enough to avoid penalties.

• Adjust estimated payments if income changes significantly throughout the year.

The IRS may waive penalties in cases of unusual circumstances, such as natural disasters or serious medical emergencies. However, relying on such exceptions is risky, and proper tax planning is always the best approach.

Maximizing Deductions and Reducing Tax Liability

Self-employed individuals have access to several tax deductions that can reduce their taxable income and lower their estimated tax payments. Some of the most common deductions include:

• Self-employment tax deduction - While self-employed individuals must pay the full self-employment tax, they can deduct half of it as an adjustment to income.

• Home office deduction - Those who use a dedicated space in their home for business purposes can deduct a portion of their rent, utilities, and other expenses.

• Business expenses - Ordinary and necessary business expenses, such as office supplies, travel costs, and professional services, are deductible.

• Health insurance premiums - Self-employed individuals who pay for their own health insurance may be able to deduct their premiums.

• Retirement contributions - Contributions to SEP IRAs, SIMPLE IRAs, and solo 401(k) plans may be tax-deductible, reducing taxable income while helping build long-term savings.

Tracking deductible expenses throughout the year is essential for accurate tax reporting and maximizing tax savings. Keeping organized records of receipts, invoices, and bank statements can make tax preparation much easier.

Planning for Estimated Taxes and Financial Stability

One of the best strategies for handling estimated taxes is proactive financial planning. Setting aside a percentage of each payment received for taxes can prevent cash flow issues when quarterly payments are due. Many financial professionals recommend saving 25–30% of self-employment income for taxes, though the exact percentage depends on individual circumstances.

Using accounting software or working with a CPA can also simplify estimated tax calculations and ensure compliance. A CPA can help with tax planning, identify potential deductions, and adjust estimated tax payments as needed. By taking a strategic approach to estimated taxes, self-employed individuals can avoid surprises at tax time and maintain financial stability throughout the year.

Estimated taxes are an important part of tax compliance for self-employed individuals, independent contractors, and small business owners. Understanding how to calculate estimated taxes, when to pay them, and how to minimize tax liability can help avoid IRS penalties and financial stress. By making timely payments, keeping accurate records and working with a CPA, self-employed individuals can manage their tax obligations effectively and focus on growing their businesses.

by Kate Supino

Managing payroll is one of the most important responsibilities for business owners. Ensuring employees are paid correctly and on time is essential not only for maintaining morale and compliance but also for avoiding payroll tax issues that could lead to audits, penalties, or even legal trouble. The IRS and state tax agencies pay close attention to payroll taxes, and mistakes—whether intentional or accidental—can trigger red flags that invite unwanted scrutiny.

The Importance of Payroll Compliance

Failing to comply with payroll tax regulations can result in serious consequences. The IRS considers unpaid payroll taxes a major offense since these funds are technically held in trust for employees. Business owners who mismanage payroll taxes may face fines, interest charges, and even criminal liability in severe cases. State agencies can also impose penalties, particularly if unemployment insurance contributions or state income tax withholdings are mishandled.

Common Payroll Tax Red Flags

Certain payroll practices can attract the attention of the IRS and state tax agencies. One of the biggest red flags is misclassifying employees as independent contractors. Employers do not have to withhold taxes for independent contractors, making this classification financially appealing. However, if a worker meets the legal definition of an employee—such as being subject to company control over their work schedule, tools, or job responsibilities—the IRS expects proper tax withholdings. Misclassification can result in back taxes, penalties, and interest.

Another common red flag is failing to deposit payroll taxes on time. The IRS has strict deadlines for payroll tax deposits, and missing these deadlines can lead to automatic penalties. The agency uses an electronic tracking system that quickly identifies late or missing payments. Employers who repeatedly delay payroll tax deposits may trigger an audit or further enforcement action.

Underreporting wages is another issue that can raise concerns. Some businesses may attempt to lower their tax burden by paying employees off the books, reducing reported wages, or providing cash payments without proper documentation. These practices are illegal and can result in severe penalties. The IRS compares wage reports with tax filings, and any discrepancies can lead to further investigation.

Payroll tax discrepancies between federal and state filings can also be problematic. If state unemployment insurance filings do not match federal payroll tax reports, state agencies may flag the discrepancy and conduct an audit. Consistency in reporting across all levels of taxation is critical for avoiding unnecessary scrutiny.

A final red flag involves excessive deductions from employee paychecks. While certain deductions, such as health insurance premiums and retirement contributions, are legitimate, excessive or unauthorized deductions can lead to wage disputes and regulatory investigations. Employees have rights under federal and state labor laws, and improper deductions can result in fines and legal claims against the business.

Best Practices for Payroll Tax Compliance

To avoid payroll tax issues, business owners should implement best practices that ensure compliance and minimize risk. One of the most effective strategies is to properly classify workers from the outset. Reviewing IRS guidelines for determining employee versus independent contractor status can help prevent misclassification errors. If there is any uncertainty, consulting with a CPA is advisable.

Maintaining accurate payroll records is another crucial step. Employers should keep detailed documentation of hours worked, wages paid, tax withholdings, and deductions. Payroll records should be retained for at least four years in case of audits or disputes. 

Timely payroll tax deposits are essential for compliance. Employers should familiarize themselves with deposit schedules and ensure funds are remitted on time, or hire a CPA to take care of it.

Accurate reporting across all tax filings is another important practice. Ensuring that payroll tax forms, such as Form 941 for federal payroll taxes and state unemployment tax filings, align with business tax returns can prevent discrepancies that might raise red flags. Regularly reviewing payroll reports before submission can catch errors before they become a problem.

Regular payroll audits can also help identify and address potential issues before they escalate. Businesses should periodically review payroll practices to ensure compliance with wage laws, tax regulations, and reporting requirements. Internal audits can uncover discrepancies, allowing corrections before regulatory agencies intervene.

Employers should also stay informed about federal and state wage laws. Minimum wage requirements, overtime rules, and tax regulations can change, and failure to comply with new laws can result in fines or lawsuits. Keeping up to date with employment law changes and consulting with a CPA when needed can help ensure ongoing compliance.

The Risks of Ignoring Payroll Tax Compliance

Ignoring payroll tax obligations can have serious financial and legal consequences. The IRS has broad enforcement powers when it comes to payroll tax violations. One of the most severe penalties is the Trust Fund Recovery Penalty (TFRP), which holds business owners personally liable for unpaid payroll taxes. This means that even if a business entity dissolves, the IRS can pursue owners and responsible parties to recover unpaid amounts.

State agencies can also impose penalties for payroll tax violations. Businesses that fail to pay unemployment insurance taxes, for example, may face penalties that increase over time. Additionally, employee wage disputes can lead to lawsuits, and businesses found guilty of wage violations may be required to pay back wages, damages, and attorney fees.

Payroll tax compliance isn’t just a legal requirement—it’s a fundamental aspect of running a responsible and successful business. Paying employees correctly, withholding and remitting taxes on time, and maintaining accurate payroll records are critical for avoiding red flags that could lead to audits or penalties.

By following best practices such as properly classifying workers, making timely tax deposits, and keeping accurate records, business owners can minimize risk and ensure compliance. Regular payroll audits and staying informed about wage laws further strengthen a company’s ability to avoid payroll tax pitfalls.

Rather than viewing payroll taxes as a burden, business owners should see them as part of a well-structured financial system that protects employees and businesses alike.

by Kate Supino

Running a business often means taking calculated risks, including extending credit to customers or offering loans to other businesses. While this can foster growth, it also comes with the possibility of nonpayment. When debts become uncollectible, they are classified as bad debts. Fortunately, the IRS provides some relief by allowing businesses to deduct certain bad debts from taxable income. Understanding the requirements and processes for these deductions is essential for compliance and to minimize tax liabilities.

Defining Bad Business Debt

Bad business debts are those that arise from business-related transactions where repayment is no longer expected. These generally fall into two primary categories: accounts receivable and business loans. Accounts receivable bad debts occur when customers fail to pay for goods or services delivered on credit. For example, a company may extend a line of credit to a client who later defaults. Business loans, on the other hand, include funds lent to suppliers, vendors, or even employees that remain unpaid despite collection efforts.

It is important to distinguish bad business debts from personal loans. Personal loans are typically not deductible unless they are directly related to the operation of the business. The debt must stem from a legitimate business transaction and meet IRS criteria to qualify for a deduction.

Requirements for Deducting Bad Debts

Not every unpaid debt can be written off. To deduct bad business debts, businesses must adhere to several IRS guidelines. The first requirement is that the debt must be a bona fide obligation that resulted from a valid and enforceable transaction. Informal arrangements or gifts do not meet this standard.

Next, the debt must be proven to be worthless. This means demonstrating that there is no reasonable expectation of repayment. Worthlessness can be established through documentation showing repeated collection attempts, communications with the debtor, and any legal action taken. The debt must also be deducted in the same tax year it becomes worthless. Failing to meet this timing requirement may result in disqualification.

The ability to deduct bad debts also depends on the accounting method used. Businesses using the accrual method can deduct bad debts because income is recorded when earned, not when received. Conversely, businesses operating under the cash method cannot claim bad debt deductions since income is only recognized upon receipt.

Steps for Writing Off Bad Debts

Properly writing off bad debts involves a systematic approach. The first step is identifying the specific debt that qualifies as uncollectible. Next, you must gather and organize all supporting documentation to demonstrate the debt’s worthlessness. This may include invoices, contracts, correspondence, and records of collection attempts.

Once the debt is identified and documented, update your accounting records to reflect the write-off. For businesses using the accrual method, this step ensures accurate reporting. Finally, include the deduction on your business tax return. The specific form will depend on your business structure; for example, sole proprietors use Schedule C of Form 1040, while corporations report it on Form 1120.

Navigating Unique Scenarios

Certain situations require extra attention when handling bad debt deductions. For instance, transactions involving related parties, such as family members or shareholders, often invite greater scrutiny from the IRS. It is critical to document these transactions thoroughly and ensure they are conducted at arm’s length.

Loans to employees are another area of complexity. While they can qualify as bad debts if unpaid, the loan agreement must be formalized to distinguish it from a gift. Additionally, non-business bad debts, such as personal loans unrelated to your business, are treated differently and are subject to short-term capital loss limitations.

Partial recoveries of bad debts add yet another layer of complexity. If you recover a portion of a previously written-off debt, you are required to report the recovered amount as income in the year it is received. This ensures compliance with tax laws and accurate reporting.

Avoiding Common Errors

Errors in handling bad debt deductions can lead to issues with the IRS. One common mistake is failing to provide sufficient evidence of worthlessness. Without proper documentation, the IRS may reject your deduction. Be sure to maintain detailed records of collection efforts and any communications with the debtor.

Another frequent error involves deducting debts that do not qualify. Informal loans, personal debts, and gifts are not eligible for business bad debt deductions. Additionally, timing errors, such as writing off debts in the wrong tax year, can result in the loss of the deduction altogether.

Misclassifying non-business bad debts as business-related is another pitfall to avoid. Non-business bad debts are subject to different rules and limitations, and incorrectly categorizing them can lead to complications during an audit.

The Value of Professional Guidance

Given the complexities of bad business debt deductions, consulting with a CPA can make a significant difference. A CPA can help identify qualifying bad debts, ensure that your records are complete, and guide you in complying with IRS regulations. They can also provide advice on how to handle unique scenarios, such as related-party transactions or partial recoveries.

Working with a CPA not only reduces the risk of errors but also ensures that you are maximizing your deductions. Their expertise can help you navigate the intricate rules surrounding bad debts, giving you peace of mind and allowing you to focus on running your business.

Bad debts are an unfortunate reality for many businesses, but understanding how to handle them effectively can mitigate their financial impact. By identifying eligible debts, maintaining thorough documentation, and adhering to IRS guidelines, you can take advantage of bad debt deductions and reduce your tax burden. Partnering with a CPA provides additional assurance that your deductions are accurate and compliant, enabling you to manage bad debts with confidence. Address these challenges proactively to protect your business’s financial health and ensure you’re taking full advantage of available tax benefits.

by Kate Supino

Running a home business isn’t without its own unique challenges. For all the conveniences that operating a business out of your home brings, there are some pitfalls that all small business owners have in common should strive to avoid. Ironically, the same admirable inclinations that gave you the tools to start and run your home business may be the very ones that prove to be your downfall. One crucial yet often overlooked resource is the expertise of a Certified Public Accountant (CPA). Could this professional be the missing link that elevates your home business to the next level?

A CPA as a Strategic Partner

Hiring a CPA isn’t like hiring a delivery person for your home-baked cupcake business. Your CPA has a vested interest in seeing your business succeed; it’s about having a strategic partner in your corner. 

For instance, CPAs can analyze your business’s financial health, identifying inefficiencies and opportunities for growth. Are you overspending on supplies? Is there an untapped tax deduction? A CPA’s trained eye can reveal these hidden details, helping you allocate resources more effectively and maximize profits.

Mastering Tax Compliance

No matter how fun your home business may be for you, no matter how much you believe that when your work is your passion you’ll never work a day in your life, there’s one aspect of operating a home business that we guarantee isn’t fun. Taxes. Almost no one has fun doing taxes. But your CPA takes on this task with aplomb, helping to ensure that your business is compliant with tax regulations while taking full advantage of available credits and deductions.

CPAs also stay updated on tax law changes, which can be particularly beneficial as laws frequently shift. For example, if a new deduction becomes available for remote businesses, your CPA can quickly incorporate it into your tax strategy, potentially saving you thousands of dollars annually.

Streamlining Bookkeeping

Bookkeeping takes up a lot of time, and make one tiny mistake and the necessary time to reconcile increases exponentially. Avoidance is worse, because the transactions keep piling up like a never-ending cascade of postal mail. It never stops. (At least, you hope so, in order to stay in business!) A CPA doesn’t do bookkeeping but they can streamline your financial records, ensuring they’re not only accurate but also accurate and insightful.

Using tools like cash flow statements and balance sheets, your CPA helps you monitor your business’s financial trajectory. With this level of organization, you'll have the clarity to plan for the future—whether that’s expanding your operations, investing in new technology, or hiring additional staff.

Business Structure Optimization

Did you already make a mistake before you even opened your doors for business? The structure of your business—whether it's a sole proprietorship, LLC, or S Corporation—can significantly impact your tax obligations and legal protections. If you’re not sure you’ve chosen the right structure, a CPA can evaluate your situation and recommend adjustments.

For example, switching to an S Corporation might reduce your self-employment tax burden, but it comes with additional compliance requirements. A CPA will help you weigh the pros and cons of each option, ensuring your structure aligns with your goals and minimizes risk.

Financial Forecasting for Growth

Imagine being the owner of not one, but hundreds of businesses across the country! Or passively raking in money each month as the top owner of a franchised business. Before you let your Willy Loman daydreams get the better of you, get in touch with a CPA who can objectively help plan your growth plans. CPAs excel at creating financial forecasts, giving you a clear picture of what’s possible and what challenges lie ahead.

Whether you’re eyeing a new market or planning to increase your product line, a CPA’s projections can help you secure financing, set realistic sales goals, and avoid overextending your resources. Their expertise ensures your ambitions are grounded in financial reality.

Navigating Audits With Confidence

The word “audit” can strike fear into any business owner, but with a CPA on your side, there’s no need to panic. CPAs are skilled at ensuring your financial records are audit-ready and can represent you before the IRS if necessary.

Not only that. Using a CPA for your taxes minimizes your chances of being audited in the first place. By maintaining accurate records and adhering to best practices, CPAs help shield your business from unnecessary scrutiny.

Saving Time to Focus on What Matters

This is one of those great features of entrepreneurs that can lead to their downfall. Don’t let it happen to you. Your time is your greatest resource, so delegating anything you don’t need to do will save you the time to do what others can’t. Namely, hiring a CPA gives you time back that you wouldn’t have if you were pouring over financials and trying to make sense of your taxes. 

Getting While the Getting’s Good

At some point, you’re going to start looking beyond your business and envisioning a simple life where someone else is doing all the work. It’s called an exit strategy, and your CPA is great at helping you to take the baby steps now to get you to the place where you can take the giant leap into retirement bliss down the road. They’ll assist with valuations, tax implications, and legal considerations, making the transition smooth and profitable so you can reap what you sowed.

When Should You Hire a CPA?

If you’re wondering when to bring a CPA into your business, the answer is: sooner rather than later. Many entrepreneurs wait until tax season or a financial crisis, but engaging a CPA early can prevent these issues altogether.

Whether you’re just starting out or looking to scale, a CPA’s involvement can provide immediate and long-term benefits. Think of it as an investment in your business’s success, one that pays dividends in saved time, reduced stress, and increased profitability.

For many home business owners, a CPA is the missing link that bridges the gap between surviving and thriving. With their expertise, you can transform your financial practices, achieve compliance, and plan for a prosperous future. If you’re ready to take your business to the next level, partnering with a CPA might just be the smartest move you can make.

by Kate Supino

Despite the changing economy, real estate remains one of the most reliable ways to build wealth. The downside to that is, the more wealth you build, the more taxes you usually have to pay. For many, finding legal ways to lower taxes is an ongoing hunt. Surprisingly, the government has actually given active real estate investors a very simple—and legal—way to defer capital gains tax on real estate transactions. Yet many seasoned investors don’t use it. Why not? For the most part, it may be because a lot of people aren’t aware of it. 

What is the 1031 Exchange Tax Deferral?

The 1031 exchange tax deferral allows real estate investors to defer taxes by selling and then buying more properties within a certain time frame, and which fall into certain categories. In a traditional real estate transaction, you might buy a property, wait for its value to appreciate, then sell it at a profit. You’d then pay taxes on the profit. Those taxes can really take a bite out of your profit; plus they reduce the amount of money you have to invest in another piece of property. This can really hold you back as far as wealth building. 

With the 1031 exchange, you buy and sell a property as usual, but instead of paying taxes on the profit, you defer taxes by following the next steps and rules set up in the tax code. The rules include:

• Hold the property for about a year to demonstrate your investment objective

• Identify between one and three properties to buy within 45 days of selling the old property

• Close on the new property within 180 days of selling the old property

• The new property has to be a like-kind property, such as a single family home and a single family home, or an apartment building and an apartment building

• Buy and sell properties in one name only

• Never take personal possession of the funds at any point in the transaction (use an intermediary to facilitate this)

As long as you follow the guidelines, the buy, sell, buy transactions qualify as a 1031 exchange and you can defer taxes on the sale. In fact, you can keep doing this as many times as you want during your lifetime. When you pass on, your heirs won’t have to pay taxes on those sales, either. If they sell your current property, they only pay tax on the current market value. Essentially, this gives you perpetual deferred taxes. 

Mistakes to Avoid

There are a number of very strict rules with the 1031 Exchange. Following are some of the most common reasons transactions end up being disqualified for Section 1031 benefits.

Offering Cheap Rent to Family Members

The 1031 exchange rules don’t prohibit you from renting out your investment property to family members or friends. Collecting rent from anyone deems it a bona fide investment. However, in order to avoid getting disqualified, you’d have to charge fair market value for the rental. That means no breaks of any kind for your beloved son/daughter, etc. The IRS may look closely at your 1031 transactions, so be sure to actually collect that fair market rent, too, so you can show receipts and deposits if you’re audited.

House Hacking

Duplexes are real property and so qualify under the 1031 exchange rules. But primary residences don’t qualify. If you’ve purchased a duplex or another multi-unit investment property and you plan to live in part of it while you rehab the other part, it then becomes a primary residence. This disqualifies your transaction for the 1031 exchange benefit.

Forming a Business Entity

One of the caveats of qualification is that the title of both properties must be in the same taxpayer’s name. So if you buy a rental under John Smith, the purchase of your replacement property must also be in the name of John Smith. Now, let’s say that you make a killing on your rentals and you decide to form a company out of this real estate investing business. You name your business John Smith, Inc., because you’re aware of the IRS 1031 rule. But John Smith the individual taxpayer is not the same as John Smith, Inc., the taxpaying company. Come tax time, you’re going to owe the capital gains tax on the sale of that first property. Another scenario would be if you buy an investment property yourself and then you get married and decide to add your spouse to the title and then from there on out you purchase 1031 exchange properties in both your names. Technically, you could be disqualified on the grounds that your spouse’s name wasn’t on the original title. The safest thing is to keep the names on all your titles identical, including spellings, nicknames and suffixes like jr. and sr. You can use any taxpayer entity you like, but it must remain constant throughout all your 1031 exchanges.

Investing Overseas

You can certainly buy a vacation rental property overseas and maybe get a nice return, but it won’t qualify as like-kind under Section 1031. As stated by the IRS, “…real property in the United States is not like-kind to real property outside the United States.”

Disguising a Fix and Flip

The 1031 exchange is not permitted for fix and flips. It’s intended for investment properties; “real property held for productive use in a trade or business or for investment.” Most investment properties need at least some rehab before they can cash flow. It’s fine to fix up your investment rental property so you can get the highest possible rent. What isn’t fine is to buy a distressed property, fix it up and then pretend to try to rent it out just long enough until you can flip it and do a 1031 exchange. This is the reason why most CPAs recommend holding your 1031 investment properties for at least a year before doing the 1031 exchange. 

There are lots of rules regarding the 1031 exchange; many of them time-sensitive. While it may feel scary to attempt to do 1031 exchanges, remember that with the guidance of a qualified CPA and an intermediary, it’s perfectly safe and legal. Don’t miss out on this opportunity to defer capital gains tax indefinitely on your real estate investment properties. 

 by Kate Supino

Every year, millions of taxpayers in the U.S. dutifully submit their tax returns, along with whatever taxes they owe to the government. But there is also a large percentage of people who find themselves short and can’t pay their taxes. Many struggle to meet their daily financial needs, let alone come up with the money to give to Uncle Sam. But not paying taxes has serious repercussions, including severe penalties, wage garnishment or even imprisonment. If you find yourself in this situation, this is the time to talk to your CPA about your options. 

Adjust Your Withholding

Ideally, you shouldn’t owe anything to the IRS on April 15th, and they shouldn’t owe you anything. For many people all over the U.S., this doesn’t pan out, for any number of reasons. Either people are having too much taken out of each paycheck and they get a refund, or they have too little withdrawn from each paycheck and they end up with a tax bill. 

Go to your company’s HR department and ask to confirm your withholding numbers. If you consistently owe taxes at the end of the year, bump up your withholding amount. If you need advice about how much to increase it, consult with your CPA, who can make calculations based on previous tax returns to come up with a reasonable withholding amount. 

Request a Payment Plan

Did you know that the IRS is not completely oblivious to the fact that many people can’t pay their taxes? In order to help out, the IRS offers a payment plan. This enables you to pay off whatever you owe, a little bit at a time. This is all done online, so you don’t  even have to visit a government office to apply. If accepted, you’ll be able to choose from a short-term payment plan of 120 days or less, and a long-term payment plan if the repayment period is longer than that. 

Not everyone will qualify, since there is an application and approval process. A pro tip is, give yourself more time than you think you’ll need to pay off the tax bill. It’s better to meet the terms of your agreement over a longer term than to default on your payments. Defaulting will almost certainly disqualify you from being accepted for a payment plan in the future. 

Request an Installment Agreement

If for some reason you don’t qualify for an online payment plan, you can apply for an installment agreement. This is for very long-term repayments that may meet or surpass 10 years. Hopefully your tax debt isn’t so high that you need 10 years to pay it off. An installment agreement, or IA, is mostly for high income individuals who haven’t paid taxes for many, many years. 

File For an Extension

The worst thing you can do if you can’t pay your taxes is ignore it by not filing at all. The IRS will quickly get wind of your missing tax return and the penalties can be severe. Get together with your CPA and file a tax extension. This will give you six more months to legally file your return. The important thing to know about tax extensions is, it doesn’t give you a “pass” on your tax bill. You still owe your tax bill on the 15th, no matter if you file the tax form or not. But if you can’t pay on the 15th and you file an extension, the IRS knows that you’re being responsible and trying to take care of it. Just know that when the 6-month deadline comes around and you pay your tax bill along with your tax return, you will likely receive a bill from the IRS for interest on the amount during that 6-month time period. 

Make Changes For the Future

With proper planning, you should be able to fairly easily manage your tax bill in the future. It will take some discipline and sacrifice, but at the end of the day you’ll rest easier when you know that you don’t owe anything to Uncle Sam. Here are some simple changes you can make that will protect your future ability to pay taxes:

Open a Second Savings Account

Many people don’t realize that you can have multiple savings accounts at their bank, but this is a good strategy. Open up a savings account that’s separate from your household savings account. This is going to be your tax savings account. You don’t want to mingle it with your regular emergency savings account, because this is money you won’t touch under any circumstances.

Automatic Deposits

Next, set up automatic deposits from your checking account. For whatever tax bracket you’re in, set aside that percentage to be deposited into your tax savings account. Most banks offer this automatic transfer service. So, if you’re in the 15% tax bracket and you get paid twice a month, have an estimated 7.5% from each paycheck deposited into your bank, automatically transferred into your tax savings account.

Come tax time, you’ll have the money you need to pay your tax bill in full. And, if you end up having more than Uncle Sam requires on April 15th, you can pat yourself on the back, because that extra money is now yours to be transferred into your personal savings account for your own use.

You may have even more options than the ones listed here, if you can’t pay your taxes. Your CPA is the best source for what to do in this situation. They can be your financial confidant and even your representative when it comes to dealing with the IRS. Get in touch today to learn more.

by Kate Supino

Being self-employed these days is more common than ever before. More people are deciding that it’s better to be their own boss rather than punch a time clock. In addition, the gig economy, as it’s called, means that more people are opting to “piecemeal” their income, getting work here and there instead of working for an employer. However, being self-employed brings its own unique set of challenges and freedoms. Chief among these challenges is the responsibility of handling your own taxes, including making quarterly tax payments. Unlike traditional employees, self-employed individuals must estimate and pay taxes on their income throughout the year. Of course, this isn’t a literal need to handle your own taxes. Most savvy self-employed people hire a CPA to handle taxes, since they are often even more complicated than if the person worked for a separate company. Still, there is some planning to do when it comes to quarterly taxes, so that the outgoing money doesn’t take you off-guard.

What Are Quarterly Taxes?

Quarterly taxes, also known as estimated taxes, are payments made four times a year to cover income tax, self-employment tax and other related taxes. The IRS requires self-employed individuals to make these payments if they expect to owe $1,000 or more in taxes when their annual return is filed. Your CPA can advise you as to whether or not you’re required to pay quarterly taxes.

The Impact on Cash Flow

Coming up with the money to pay quarterly tax payments can be challenging for the self-employed. One main reason is that cash flow is a common challenge for people working for themselves. It certainly takes some experience and finesse to ensure positive cash flow each month, even in a traditional business environment. For this reason, it’s helpful to learn how to calculate your estimated tax payments ahead of time. Your CPA can help you with this task, but you should learn how to do it, as well.

Calculating Your Estimated Tax Payments

1. Estimate Your Annual Income

Start by estimating your total income for the year. This includes income from all sources, such as freelance work, gig economy jobs, and business profits.

2. Calculate Your Adjusted Gross Income (AGI)

Your AGI is your total income minus any adjustments, such as retirement contributions and health insurance premiums.

3. Determine Your Taxable Income

Subtract your standard deduction or itemized deductions from your AGI to get your taxable income.

4. Apply the Appropriate Tax Rates

Use the current year’s tax rate schedules to estimate your tax liability. Don’t forget to include self-employment tax, which covers Social Security and Medicare taxes.

Understanding Self-Employment Tax

Self-employment tax is a significant part of your estimated taxes. It comprises Social Security and Medicare taxes and is calculated at a rate of 15.3% of your net earnings from self-employment. This includes both the employer and employee portions of these taxes.

Making Your Quarterly Payments

Once you’ve calculated your estimated taxes, it’s time to make your payments. The IRS has set specific due dates for these payments:

• April 15 for income earned from January 1 to March 31

• June 15 for income earned from April 1 to May 31

• September 15 for income earned from June 1 to August 31

• January 15 of the following year for income earned from September 1 to December 31

You can make your payments online through the IRS Direct Pay system, by mail using Form 1040-ES, or via the Electronic Federal Tax Payment System (EFTPS).

Protect Yourself by Setting Aside Money for Taxes

To ensure that you always have the cash available to pay your quarterly taxes, experts recommend that you set aside the money. Don’t even factor it into your income. One of the biggest challenges for self-employed individuals is setting aside enough money to cover their quarterly tax payments. Here are some tips to help you get it done:

1. Create a Separate Tax Account

Open a separate bank account dedicated to your tax savings. Transfer a portion of your income to this account regularly. It could be as simple as a second savings account, connected to your business checking account. Keep it at the same bank so you can transfer money into it in seconds.

2. Use a Percentage Method

Calculate a percentage of your income to set aside for taxes. A common recommendation is to save 25-30% of your earnings. Get together with your CPA to figure out what percentage you should use. If it consistently ends up being too much or too little, you can always tweak it.

3. Automate Your Savings

Consider setting up automatic transfers to your tax savings account to ensure you consistently save money for your quarterly payments. Depending upon your banking institution, you could automatically have a certain amount transferred each time you make a deposit.

Benefits of Paying Quarterly Taxes

By now, you may feel like paying quarterly taxes is a burden. But there are some advantages that come with the territory, including:

Avoidance of Penalties

Paying quarterly taxes if you fall into the correct category isn’t an option; it’s obligatory. By paying them as directed you can avoid hefty IRS penalties.

Better Management of Cash Flow

When you know you have to pay quarterly taxes, you may have a tendency to pay closer attention to your cash flow, which is always a good thing.

Peace of Mind

It feels good to know that you’re in compliance with the law. This may reduce stress and allow you to focus on growing your business.

Planning for quarterly taxes as a self-employed individual requires diligence and careful calculation. By estimating your income accurately, setting aside money regularly, keeping detailed records, and staying informed about tax laws, you can ensure that you meet your tax obligations and avoid unnecessary penalties. Remember, consulting a CPA can provide additional peace of mind and help you navigate the complexities of self-employment taxes.

by Kate Supino

People can have strange relationships with money. For some, it’s a powerful tool to get what they need. For others, it’s a necessary evil; something they have to contend with to live in this world. Some people want to accumulate as much money as possible; others believe that wealthy people must have done something bad to get where they are. The psychology of money and our relationship to it isn’t just fiction. It’s a genuine field of study called Behavioral Economics.

Behavioral economics combines parts of psychology and parts of economics to shed light on why people make the choices they do. An essential understanding is that people don’t always make the most rational decisions or the ones that seemingly would offer the optimal results. This is true even in situations where the person has all the experience and information to make the smartest decision. Often, money decisions are made based on emotions. Consider an example like a gambler, who knows the odds are against them, sees their stack of chips getting shorter, knows their bank account is nearly in the red, yet continues to place bets. The more you understand behavioral economics, the more control you may have over the way your personal relation with money influences your financial choices.

The Money Mindset

The money mindset is the way you think about money. When you think about money, how do you envision it? Do you feel like everybody else has money and no one wants to give you any? Do you feel like money is abundant in the world and all you have to do is step into the abundance? When you get money, does it instill a sense of fear or a sense of empowerment? Your upbringing, experience and your surrounding culture all play a significant role in how you perceive matters of money. It’s worth spending some quiet time thinking about how you feel and think about money. This is the first step in taking control over your financial decisions.

Loss Aversion

Loss aversion is a core concept in behavioral economics. It’s a kind of psychological bias where the pain of losing money is more strongly felt than the joy of gaining money. If a person has loss aversion, they may immediately get fearful when they come into money because they are afraid of losing it; so much so that it nearly overrides the pleasure of getting the money. Those with loss aversion tend to be very conservative with their money. They may avoid investments altogether, opting instead for a savings account, or even hiding money in the house. Their financial decisions are often driven by fear instead of logical reasoning.

Anchoring

Anchoring is a cognitive bias that appears in behavioral economics as well as other areas of psychological study. Anchoring is when a person anchors their choices on a specific reference point. The danger is when the reference point is no longer valid. In finances, a person may anchor decisions to how much their first paycheck was, or the value of an item when they first purchased it. For example, have you ever visited an elderly family member whose collection of Beanie Babies has taken over a guest bedroom? They’re anchoring their hoarding on the big financial bubble that Beanie Babies created years ago, when they first came out. Since then, so many Beanie Babies have been made that they will likely never be worth much more than retail. But that person can’t see that their decision is based on an anchor point that is now irrelevant. It’s important to regularly reassess anchor points to ensure they are still accurate in current economic conditions.

Herd Behavior

Herd behavior is more prevalent now than ever. From social media influencers to flashy money gurus, everyone seems to be “following” someone. Our natural instinct to be social means that we want to be part of a group. People tend to buy when and what everyone else is buying, and sell when and what everyone else is selling, irrespective of the underlying value of the asset. We all want a piece of the money pie. But herd behavior often leads to bubbles and crashes in financial markets. It can also lead to personal financial ruin. It’s not a good way to approach finances because everyone has unique goals and financial circumstances. While it’s important to stay abreast of market trends, it’s never a good idea to blindly follow where others lead, no matter how many other followers they have.

Sunk Cost Fallacy

This is a tendency to keep throwing good money after bad. In finance, it’s a behavior to continue investing in something because of the resources already committed, even when it no longer makes financial sense. In investment, this might manifest as holding onto a stock or asset that is continuously losing value. The person doesn’t want to admit that the original plan didn’t work. The previous investment influences the decision to remain committed, when in reality, the amount of previous investment is unrelated to the potential outcome.

Overconfidence

This is a cognitive bias reflected by overestimating one’s own abilities or intellect. In finance, it can manifest as taking exceptional risks, based on the belief that the person has a special talent that others lack. It may make a person believe that they can outperform the market. It can also manifest as an unwillingness to listen to sound advice, even when that person has paid for or requested the advice in the first place.

It can be exceedingly helpful to make efforts to understand one’s own relationship to money and to making financial decisions. One of the recommended paths to a better understanding is to talk to a CPA for unbiased guidance on tax-related matters. For more information, contact your CPA today.

by Kate Supino

If you’re a business or self-employed, you have to deal with estimated tax payments. These are used to pay alternative minimum tax, income tax and self-employment tax. Many people find estimated tax payments to be a nuisance, and they wonder if they are mandatory. The fact is, the IRS is within its rights to penalize taxpayers who miss estimated tax payments, so it’s worth the time to fully understand what estimated tax payments are, and your obligations for payment.

What Are Estimated Tax Payments?

Estimated tax payments are payments made to the IRS and state tax departments throughout the year on income that isn't subject to withholding. This typically includes income from self-employment, business earnings, interest, rent, dividends, and other sources.

The U.S. income tax system is a pay-as-you-go system, meaning taxes must be paid as you earn or receive income during the year. If you don't have enough tax withheld, such as is the case with a traditional paycheck, or if you don't make the appropriate estimated tax payments on money you earn elsewhere, you could face a penalty for underpayment at the end of the year.

Who Has to Make Estimated Tax Payments?

If you earn money that doesn't already have tax payments taken out of it, then chances are you have to make estimated tax payments. This includes small business owners, gig economy workers, freelancers and even side business hustlers. It also specifically includes:

• S corporation shareholders

• Sole proprietors

• Partners

• Individuals as noted above

If the expected tax due by the filing deadline is at least $1,000, then estimated tax payments have to be made. In the case of corporations, the minimum is $500, not $1,000.

Now, some of these may go unnoticed by the IRS for a while, such as gig economy workers and side business hustlers, but once the IRS catches up, penalties will follow unless estimated tax payments have been made.

Who is Exempt From Making Estimated Tax Payments?

If you meet all three of the following conditions, you’re exempt from making estimated tax payments:

1. You were a resident alien or U.S. citizen for the entire tax year

2. You did not owe any taxes the previous year

3. Your prior tax year encompassed 12 months

How and When Are Estimated Tax Payments Made?

Estimated taxes are paid on a quarterly basis, so they happen four times a year. Each period has its own due date. The date of the postmark is considered the date of payment. However, most people make their estimated tax payments online, since it’s more efficient, easier and more secure. This is done using the EFTPS system, which is online. Corporations don’t have a choice; they must utilize the EFTPS system.

Note that if the due date for a period falls on a weekend or legal holiday, the due date becomes the next day that isn’t a weekend or legal holiday. So, if the due date is a Sunday, the due date becomes Monday. If the due date is Memorial Day, the new due date is the next day, which would be a Tuesday.

If, for any reason, you don’t wish to wait until the end of the quarter to pay your estimated taxes, you can pay more often using the EFTPS system. They can be made weekly, bi-weekly or monthly, if that fits in better with your budget.  As long as the total due is paid by the quarterly deadline, all is well.

Penalties Regarding Underpayment or Nonpayment of Quarterly Taxes

Many people don’t realize it, but they may incur a penalty for underpayment or nonpayment of estimated taxes even if they end up getting a tax refund at the end of the year. Again, this relates to the pay-as-you-go system of U.S. taxes. But this is a legal option that isn’t always enforced.

If you owe less than $1,000 in taxes, or if you paid at least 90% of your taxes, the IRS may forgo issuing a penalty. However, it’s best not to take that chance, and just pay the estimated taxes as required because, yes, they are required.

Tips to Make Estimated Tax Payments on Time

Making estimated tax payments on time comes down to being organized. But here are some tips to make it easier.

1. Hire a CPA

When you have a CPA working for you, you don’t have to think about estimated tax payments. They can send you the payment coupon with the due date on it, to which you attach a check and mail. Or, your CPA can mail the check for you with your permission. Or, your CPA can access your EFTPS account online and take care of the payments for you throughout the year and email you the confirmation. It’s all part of the service that a CPA can provide.

2. Mark Your Calendar

Use your calendar to set up recurring due dates for estimated tax payments. Even better, set up a second set of recurring dates a week from the actual due date so you can ensure you have enough cash to cover the tax payment in a liquid account.

3. Utilize the Option to Pay More Frequently

If you find it burdensome to come up with a large sum each quarter, make smaller weekly or bi-monthly payments using the EFTPS system. This way, it can feel like you’re not making huge lump sum payments four times a year.

Estimated tax payments are no one’s favorite part of paying taxes in the U.S. But they are a requirement that comes with a penalty for ignoring them. If you have questions about how to possibly reduce your estimated tax payments, or for better ways to manage this tax obligation, contact your CPA for counseling.

- by Kate Supino -

If you’re a business or self-employed, you have to deal with estimated tax payments. These are used to pay alternative minimum tax, income tax and self-employment tax. Many people find estimated tax payments to be a nuisance, and they wonder if they are mandatory. The fact is, the IRS is within its rights to penalize taxpayers who miss estimated tax payments, so it’s worth the time to fully understand what estimated tax payments are, and your obligations for payment.

What Are Estimated Tax Payments?

Estimated tax payments are payments made to the IRS and state tax departments throughout the year on income that isn't subject to withholding. This typically includes income from self-employment, business earnings, interest, rent, dividends, and other sources.

The U.S. income tax system is a pay-as-you-go system, meaning taxes must be paid as you earn or receive income during the year. If you don't have enough tax withheld, such as is the case with a traditional paycheck, or if you don't make the appropriate estimated tax payments on money you earn elsewhere, you could face a penalty for underpayment at the end of the year.

Who Has to Make Estimated Tax Payments?

If you earn money that doesn't already have tax payments taken out of it, then chances are you have to make estimated tax payments. This includes small business owners, gig economy workers, freelancers and even side business hustlers. It also specifically includes:

• S corporation shareholders

• Sole proprietors

• Partners

• Individuals as noted above

If the expected tax due by the filing deadline is at least $1,000, then estimated tax payments have to be made. In the case of corporations, the minimum is $500, not $1,000.

Now, some of these may go unnoticed by the IRS for a while, such as gig economy workers and side business hustlers, but once the IRS catches up, penalties will follow unless estimated tax payments have been made.

Who is Exempt From Making Estimated Tax Payments?

If you meet all three of the following conditions, you’re exempt from making estimated tax payments:

1. You were a resident alien or U.S. citizen for the entire tax year

2. You did not owe any taxes the previous year

3. Your prior tax year encompassed 12 months

How and When Are Estimated Tax Payments Made?

Estimated taxes are paid on a quarterly basis, so they happen four times a year. Each period has its own due date. The date of the postmark is considered the date of payment. However, most people make their estimated tax payments online, since it’s more efficient, easier and more secure. This is done using the EFTPS system, which is online. Corporations don’t have a choice; they must utilize the EFTPS system.

Note that if the due date for a period falls on a weekend or legal holiday, the due date becomes the next day that isn’t a weekend or legal holiday. So, if the due date is a Sunday, the due date becomes Monday. If the due date is Memorial Day, the new due date is the next day, which would be a Tuesday.

If, for any reason, you don’t wish to wait until the end of the quarter to pay your estimated taxes, you can pay more often using the EFTPS system. They can be made weekly, bi-weekly or monthly, if that fits in better with your budget.  As long as the total due is paid by the quarterly deadline, all is well.

Penalties Regarding Underpayment or Nonpayment of Quarterly Taxes

Many people don’t realize it, but they may incur a penalty for underpayment or nonpayment of estimated taxes even if they end up getting a tax refund at the end of the year. Again, this relates to the pay-as-you-go system of U.S. taxes. But this is a legal option that isn’t always enforced.

If you owe less than $1,000 in taxes, or if you paid at least 90% of your taxes, the IRS may forgo issuing a penalty. However, it’s best not to take that chance, and just pay the estimated taxes as required because, yes, they are required.

Tips to Make Estimated Tax Payments on Time

Making estimated tax payments on time comes down to being organized. But here are some tips to make it easier.

1. Hire a CPA

When you have a CPA working for you, you don’t have to think about estimated tax payments. They can send you the payment coupon with the due date on it, to which you attach a check and mail. Or, your CPA can mail the check for you with your permission. Or, your CPA can access your EFTPS account online and take care of the payments for you throughout the year and email you the confirmation. It’s all part of the service that a CPA can provide.

2. Mark Your Calendar

Use your calendar to set up recurring due dates for estimated tax payments. Even better, set up a second set of recurring dates a week from the actual due date so you can ensure you have enough cash to cover the tax payment in a liquid account.

3. Utilize the Option to Pay More Frequently

If you find it burdensome to come up with a large sum each quarter, make smaller weekly or bi-monthly payments using the EFTPS system. This way, it can feel like you’re not making huge lump sum payments four times a year.

Estimated tax payments are no one’s favorite part of paying taxes in the U.S. But they are a requirement that comes with a penalty for ignoring them. If you have questions about how to possibly reduce your estimated tax payments, or for better ways to manage this tax obligation, contact your CPA for counseling.

- by Kate Supino -