When Tax Day rolls around, those who owe taxes are often a little disgruntled. But, if you have a home business, you need to be extra careful if you owe. Don't forget that you actually have two tax payments to make: What you owe from underpaying the year before, and your first quarterly estimated tax payment for the current year.
Quarterly Estimated Taxes
When you have side income, you might need to pay estimated quarterly taxes. If you are making regular income throughout the year, and not having it withheld by an employer, the IRS expects you to pay quarterly. A traditional employer pays taxes quarterly — including the amount of money withheld from your paycheck for the purpose. And if you are making income on the side, you are expected to pay quarterly as well.
Over the course of the year, this can be a helpful state of affairs. You make your quarterly payments, and you don't have to worry about coming up with the money to pay a huge bill on Tax Day. At least that's the theory. You still need to plan carefully, though, or else when Tax Day rolls around you could find yourself in trouble.
Two Tax Bills Due on Tax Day
When I first started with my home business, I got on track with quarterly tax payments, and began making them faithfully. However, as my income grew, it was plain that the quarterly tax payments weren't enough to cover my total tax bill. I usually owed a couple thousand more at the end of the year. That didn't seem too bad — provided I was prepared for it.
However, one thing I didn't prepare for was the fact that the quarterly estimated payment for the first quarter of the current year is due on Tax Day. So, instead of making one tax payment, I actually needed to make two tax payments. And that didn't even count the bill owed for my state taxes.
One year, I discovered that, with what I owed the IRS from the previous year, plus the quarterly tax payment, plus state taxes, I had almost $8,000 due on Tax Day! While I was prepared to pay some of it, I had been so focused on paying what I owed at the end of the year that I forgot about my new quarterly estimated tax payment. The result, unfortunately, was raiding the emergency fund as a way to help pay what was owed.
It's true that many of us would rather owe the government, rather than get our own money back, without earning interest, through a tax rebate. However, there does need to be a level of preparation. And, if you are making quarterly estimated tax payments, it's important to consider that they may not be enough to cover what you owe throughout the year — especially if your income is growing. On top of that, remember that your first quarterly payment will be due the same day as your previous year's tax bill. Plan ahead for that reality, or you could find yourself stuck.