First of all, happy Monday everyone!
This week marks a new milestone for us, because we are making the shift from the weekly Sunday blog we have been bringing to you for the past few years to Mondays.
I’ll remember this day easily because of a dumb joke my mother used to have when I was a wee lad: March 4th is also known as soldier’s day.
Get it? March 4th? March forth? Yeah, I know, queue the facepalm emoji here.
Effective today, Monday, March 4, 2024 the blog will now come to you on the first business day of the week.
I hope you enjoy it. I’ve dreamed up a helpful topic that, if taken seriously, can change your life.
This is nothing less than a complete paradigm shift in the way you’re looking at your annual tax filing, and submitting your tax payments.
Did you see where I said payments, plural?
Allow me to elaborate…
The Annual Necessity
Physicians, if you’ve been in practice at least a year then you have already filed taxes at least partly comprised of the money you make from your practice.
How’s that been going for you so far?
Have you ever input your taxes yourself, or else got them back from your preparer, and you have an amount called underpayment penalty added to your amount due line on the 2nd page of your 1040?
You have? Think about this next part, now…
Have you ever wondered why you’re paying that, and/or even if you have a way to avoid paying it?
Yes? Good!
Because I’m going to give you some help here.
You have to file taxes every year. The only way out of it is if you have unearned or wage income under the standard deduction or self-employed income under $400.
The “why” that goes into those parameters is best discussed another time. For now, let’s assume that this is true because I have no reason to lie to you. Fair enough?
You’re in business, and if you are still reporting income on Schedule C attached to your 1040 you have to file taxes on April 15th assuming that’s a weekday.
If you are in a partnership, or have elected to be taxed as an S Corporation you also have that return to get done by March 15th, a full month earlier.
That is the necessity, and it is undisputed assuming you’re making a living from your practice.
The Quarterly Necessity
While you were working your way through medical school did you ever have to take a menial job to make ends meet?
And by job I mean interviewing for a position, turning in a W4 when you started, and getting period paychecks and a W2 reporting your wages and taxes at the end of the year?
There are downsides to working for someone who you depend on to value you enough to keep you in decent food and housing, but there is one huge upside.
The pure bliss of employer-managed taxes.
By law, your employer had to withhold your half of FICA (Social Security and Medicare) as well as federal and state taxes based on that W4 you filled out.
All you had to do was get the check, grumble about how much of your gross disappears after all the thing that turn it into your net, and cash it.
That part is good, because you only have to focus on what you do for “The Man” (whether this person is male, female, or non-binary), and not on the pay-as-you-go nature of IRS taxation.
Let me say that again: pay-as-you-go. That’s right.
You can Google this if I can’t convince you, but your federal government insists that taxes are paid throughout the year.
If you’re hesitating to believe that? It may be because you’ve worked for a small businessperson in the past that only filed and paid taxes once a year.
What comes to mind for me as a good example is a general building contractor.
The guys that hire a few, or a dozen or so people and pay them as subcontractors instead of employees, and then file at the end of the year.
What they aren’t telling you (assuming they’re even aware of it themselves) is that unless they’re making four good Estimated Tax payments throughout the year they’re paying a penalty along with that tax nut.
Because, you see, taxes are pay-as-you-go for everyone in good old Uncle Sam Land, but we entrepreneurs at least only have to deal with it four times a year.
Assuming these deadline dates fall on a weekday they are: April 15th, June 15th, September 15th, and January 15th following the end of the year.
Now, some tax experts will read this and split the obnoxious hair that you don’t really HAVE to make quarterly payments in your first year of entrepreneurship, and they’re technically right by IRS code.
I reject this argument on two grounds:
- Even if it is your first year, and you don’t have to worry about underpayment penalty, you still have to come up with the entire amount of tax by April 15th.
- Good habits are created foundationally and strengthened by routine repetition. Why not develop a good habit that also attaches the tax to the period you made the money in from Day One?
So from the very start you want to estimate your income for the year based on January through March for the April payment, January through May for the June payment, and January through August for the September payment.
Then, of course, you should have a more precise estimate for the following January 15th because the tax year has been over for a couple of weeks by then.
If you do this right your taxes are fully, or almost fully paid months before your tax return is due.
Think about this, hard. Then tell me if this sounds like a fantastic stress-relieving idea.
It should.
The Annual Goal
Here is where we close the circle on the logic arc we started at the beginning.
Old way: pay nothing all year, do the taxes, have a huge bill, then either wipe out savings to pay it or even worse?
Apply for an installment agreement and pay the tax in arrears.
Way bad idea because now you’re also paying an installment agreement fee plus interest on money you should have already paid in.
See what I mean?
New way: calculate your income by dividing the number of elapsed months into 12, then using that as a factor to multiply to your period’s income.
For the first quarter that’s simply 4 (12 months divided by 3), second quarter is 2.4 (12 months divided by 5), and third quarter is 1.5 (12 months divided by 8).
Calculate the tax (there are online helps, or your humble author makes a living doing this for people four times a year), then divide that tax by the same factor, round it to a whole sensible number, and pay it online.
For the federal government simply Google IRS Direct Pay – this is one of the few things they’ve actually made easier. For the 41 states that have an income tax on earned income try Googling this: (your state) estimated tax payment online.
To Wrap This Up Then…
If you, my physician entrepreneurs are making your quarterly Estimated Tax payments four times a year, then tax time should be an opportunity to measure performance.
It should NEVER be a time of financial stress for you or your family.
If you’re treating tax planning correctly during the four quarters ending before April, June, September, and January you are on track for the best shift you can make in your business finances.
Owing little or no tax at all when you file in April puts you perfectly on track to make your 1st quarter Estimated Tax payment in April without undue hardship, and your world is a better place.
Physician entrepreneurs, if you would like to discuss how having a non-equity financial partner guiding your practice’s business future can increase your wealth, reduce your taxes, and provide the peace of mind that will allow you to put 110% of yourself into your patient care goals?
We would like to talk to you as well.
We are still accepting one new business advisory clients in the month of February.
Use the link I’m providing below now to choose a time to talk that’s most convenient for you.
You will also receive your own copy of 5 Mistakes Physicians Make That Hurt Cash Flow, just for booking a call.
Imagine having a financial coach and compliance expert by your side, so that you can focus your professional clinical time where it belongs: on patient care.
Does that sound good?
Then reach out to me, and let’s talk: Free Profit & Cash Flow Analysis