First of all, let us clarify what the 3rd quarter Estimated Tax Payment IS.
There are 4 Estimated Tax Payment deadlines every year, and they land on the 15th (or the next following weekday of:
April (same as the 1040 deadline for the previous year)
June
September
January of the following year.
That makes Thursday, September 15th, 2022 the 3rd quarter deadline that is presently looming large.
I guess that explains the WHEN, now let me get to the promised WHY.
I find it’s easiest for me to think of this, and share with others, the idea that this is the adult version of self-withholding.
If you’ve ever worked for another person as an employee (most of us have), you know the almighty government requires your employer to play nursemaid to the worker, and withhold as well as periodically pay both income tax and FICA (think SSI and Medicare).
You get a check for considerably less than the per-hour times hours worked, look with loathing and disgust at all of the bites that come out of it on your paystub, but other than that it’s done for you.
Chances are you’ll even over-withhold income tax and get a big fat juicy refund back during tax season.
I discourage this practice for several very good reasons I’ve gone into in many past postings, but my reach is understandably limited.
At least so far. Nyah-ahh-ahh!
But I digress. We’re talking Estimated Taxes, what I’d like to get the world to think of as “The Entrepreneur’s Self-Withholding.”
Because, as an entrepreneur you don’t have the nanny, the man, insert favorite term for a boss here-person taking care of your tax for you anymore.
It’s up to you.
Is it important? Yes, IF you’re going to owe at least $1,000 in federal income tax come next filing season.
Why?
Because, as they are so fond of doing, they penalize you for under-withholding.
This is the IRS’s version of corrective disciplinary action.
How they get us to obey all of their vast plethora of rules.
They hit you in the wallet for being out of compliance.
It’s so much easier for them than actually helping people to understand the system.
That’s what I’m here for.
To help you understand.
So, are you wondering yet why I think the 3rd quarter payment, in particular, is important?
You should!
I know a lot of people, and know of countless others, that see an increase in both gross revenue and net income in the summer months.
These fine folks fall into two categories in my mind: those who made one or both Estimated Tax payments earlier this year in April and/or June, and…
…those who have blown it off so far.
These latter folks may or may not have had a slow winter/spring, which is highly likely and particularly possible for brand-new businesses.
If you didn’t make any money, or hardly any, in the first quarter I wouldn’t pay anything in, either!
But now, all of a sudden, fortunes have risen to some degree, and it’s a really-really good idea to get a fairly accurate payment into the IRS by the 15th.
The state too, if you’re in an income tax state, and it’s applicable in your situation.
Of course, for the first group, those who already know the value and necessity of budgeting tax payments all year, September is an opportunity to really drill down and focus a payment to as close the estimated tax for the year as possible.
And, it’s actually pretty simple.
Assuming you’re accounting only for the business income, you take your profit & loss statement for the year-to-date, January through August.
8 months.
Multiply the “bottom line,” net income by 1.5, and voilà!
Your estimated net income for the year.
Figure the tax for that amount (many online 1040 calculators if you like that sort of thing – of course if you have a full-service person like me, he or she should be or will do this for you).
Subtract the total amount you’ve already paid earlier in the year. Then divide that difference in half (because there’s one more deadline in January).
Round to the next lower whole $100 amount (my preference, personally), and send them that.
If you have any questions about this at all, or about all of the excellent things a premium-level CFO and tax specialist can do for you, please do reach out soon.
You can comment “Help!” below, or click on my name and then my cover photo for a link to my Work-With-Me page, and schedule a free talk with me.
The month is young, so I still have space for two new clients in September.
No matter what, though, do seriously consider making a September estimated payment.
It really can save you hundreds of dollars next April.
Have a most amazing Labor Day tomorrow, and by the way happy 3rd trimester of the year, too!