If your business has an income that’s irregular or unpredictable, dealing with estimated taxes can become a significant challenge, every year.
While employees have their taxes automatically withheld from their paychecks, most business owners must calculate their estimated payments, and submit them in a timely manner throughout the year. With a fluctuating income, estimates become more difficult for business owners to make, and non-compliance becomes more of a risk.
Working with an experienced accounting firm in Coral Springs can of course help, but here are 5 steps you can take to manage your tax payments as the owner of a business with an irregular income:
- Understand when tax payments are due
Find out when your taxes must be paid, and submit your payment on time; this is one of your first and most important commitments as a business owner.
Failure to do so could see the IRS charging you with big penalties and interest, so paying on time should always be a priority.
- Understand how much you should be paying
If you have any other forms of income that are subject to withholding, such as IRA distributions, Social Security or wages for you or a spouse, you could have more withholding from them so that you can reduce your need to make estimated tax payments, but it depends what the ratio is between your business income and income from those other sources.
For income that changes throughout the year, knowing how much you should be paying in taxes can be particularly troublesome, and you’ll want to avoid overpaying and underpaying.
A tax accountant can guide you, and if you have multiple sources of income that aren’t consistent, working with one may be essential to avoid IRS penalties. You should also ensure that you keep your business and personal expenses wholly separate so that it’s easier to accurately track the net income from your business.
- Put a tax plan in place
Once you’ve determined the amount of tax you need to pay, you should create a plan that ensures you save the appropriate amount. While the precise amount to put aside for taxes depends on the structure of your business, its tax bracket, states of residency etc, you can set aside 25-40% of your income if self-employed as a general rule of thumb, or use the following, adjustable formula if your income is relatively consistent:
- Leave 50% for operating expenses, 30% in a separate account until the deadline for estimated taxes, and 20% for personal expenses
This will help limit unpleasant surprises when your taxes need to be filed in April.
If your income is typically inconsistent, your savings should be adjusted as your income goes up and down. For good months, think about setting 50-60% to one side to cover you for slower months.
- Track your deductions
When your focus is in your irregular income, it’s easy to forget about any expenses you may have incurred, but documenting every single one is really important if you want to be able to take advantage of every deduction you’re eligible for. From advertising and startup costs, to software, continuing education and home office expenses, deductions could help you reduce your estimated tax payments and put less of a strain on unpredictable cashflow.
- Seek professional help
With a monthly income that fluctuates, professional tax planning in Coral Springs can guide you towards a proactive, rather than reactive, response. Whether you simply need a second opinion, or someone to take control and plan your taxes, seeking help from a small business tax expert, can be a very valuable solution.
Working with a tax expert throughout the year can keep estimated tax payments in alignment with your business’s current performance, and reduce much of the headache often associated with business taxes. If you aren’t already monitoring trends in your income, and adjusting payments proactively, now is the time to start. Failure to do so could lead to penalties and a lack of financial flexibility.
