Latest / The Cynical CPA / The Tax Nobody Warned You About: Estimated Taxes
Transcript
- Corrine Hasbany: Welcome to The Cynical CPA, the podcast where accounting meets real life and we keep it blunt, honest with zero sugarcoating. I'm your host, Corrine Hasbany CPA, Enrolled Agent and founder of XAct Accounting Services. Each episode, we cut through the accounting jargon, tax confusion and bookkeeping chaos and tell you what actually matters. No fluff, no spin, just real talk, real numbers and the truth you wish your accountant told you sooner. Let's get into it. Welcome to the Cynical CPA, the podcast where accounting and tax meets real talk. I'm Corinne Haspeny, CPA and Enrolled Agent, and today we're talking about estimated taxes. What they are, who needs to pay them, and what no one really tells you until you're already stressed about making the payment. We're going to break down estimated taxes and hopefully make this whole process feel a little less overwhelming. So let's get into it. Maybe nobody warned you that when you left your W 2 job and started your own business or became a freelancer, you were also taking over the job of the payroll department. And that includes paying your own taxes. When you were on someone else's payroll, taxes quietly disappeared from your paycheck before you even saw the money. Federal, state, social security, and Medicare taxes were taken behind the scenes by your employer, and they withheld them and shipped them off to the IRS and the state. But when you're a business owner owner or work as a freelancer, nobody's automatically doing that for you. You receive the gross amount of your invoices and suddenly it feels like all of the money is yours. But here's a spoiler alert. It's not. And then one day your accountant says you need to make estimated tax payments and you're thinking, what? I have to pay taxes now? I haven't even finished making the money yet. Welcome to the world of estimated taxes. So first, What are estimated taxes? If you're self-employed, own a business, are a 1099 contractor, or receive income without enough taxes being withheld, you may need to pay taxes throughout the year instead of waiting until you file your tax return. Estimated taxes are essentially the tax system's way of saying, we'd like our portion throughout the year, please. And for many self-employed individuals, that can include federal income tax, self-employment tax, which is Social Security and Medicare taxes, and potentially state income tax. And this is where many business owners and individuals get blindsided. Because nobody really explains what changes when you stop being someone else's employee. When you're someone else's employee, their business is handling the tax withholding for you. When you're self-employed, you have to plan it for yourself. And that's a completely different mindset. You're no longer just looking at how much money did I make, you're also asking how much of that money is actually available to me. Now let's get to the question that everybody wants answered. How much am I supposed to pay? And here's where I want to clear up a very common misconception. There isn't a magic rule that says you're self-employed, so just send the IRS this percentage of what you make. It doesn't work that way. Your estimated tax liability depends on your individual tax situation, and that includes factors such as your income, your business expenses, your filing status. Other sources of income, tax deductions and credits, withholding from other jobs, self-employment tax, state taxes, and even what happened on your prior year return. Those all matter. So yes, putting money aside is important, but don't assume that some random percentage you heard online is automatically the right answer for you. Your neighbor's estimated payment isn't necessarily your estimated payment. Your business isn't necessarily the same as the business you saw on TikTok. And your tax situation isn't necessarily the same as the person giving advice on Instagram. Tax planning is personal. I often hear, but my income is unpredictable. And I know business income isn't always predictable and it fluctuates. Some months are amazing, some months are very slow. Expenses fluctuate. Cash flow changes constantly. Maybe January was terrible. February was great. March was even better, but then you had a huge expense in April. Maybe you landed a major client in June. Maybe things slow down again in August. That's business. So your tax situation may change as your income changes. And that's why I don't want business owners thinking, I figured out my estimated payment once, so now I'm done. Your circumstances can change, your income can change, your deductions can change, your business can change, and your tax projection may need to change with it. This is where tax planning becomes so important. Tax planning isn't something that should happen only when your tax return is being prepared. By then the year is already over. Tax planning means looking ahead, reviewing profit trends, looking at what's changed, adjusting estimated tax payments when appropriate, and discussing major purchases, retirement contributions, business changes, or other significant transactions before they happen. The earlier you plan, the more options you usually have. Now let's talk about financial avoidance. And you know, I understand it. When people feel overwhelmed by money, they avoid looking at it. They stop opening their accounting software, they ignore emails from their accountant, they put off looking at the numbers, and they tell themselves, I'll deal with it later. But unfortunately, financial problems don't usually get better because we ignore them. They grow. The longer accounting gets delayed, the harder everything feels. Then tax season becomes emotionally exhausting. Because now you're trying to catch up the accounting, find missing documents, understand what happened financially, figure out your tax liability, and figure out how you're going to pay the taxes, all at the same time. That's where the emotional damage comes in. And the problem usually didn't start in April, it started months earlier. Another question that often comes up is, what if I have a business but I also have a W-2 from another company? And here's something people sometimes forget. You don't necessarily have to make estimated payments simply because you have business. If you also have a W 2 job, you may be able to adjust your withholding from your paycheck instead. That's one of the reasons I don't like blanket advice. One person may make quarterly estimated payments, another person may increase their W 2 withholding, and another person may have a combination of withholding and estimated payments. It depends on the overall tax situation. The most important thing is that enough tax is being paid throughout the year. And if you're an S Corp owner, there's another layer to this conversation. S Corp owners generally receive wages through payroll, which means taxes are withheld from those wages. But that doesn't necessarily mean you're done. The S Corporation's income passes through to the shareholder's personal tax return and can affect the shareholder's overall tax situation. So don't automatically assume I have payroll, so I'm covered. You may still need estimated payments depending on your overall circumstances. This is one of those situations where your payroll, your books, your tax return, and your tax planning need to work together. They're not separate little boxes. So let's make this practical. Here are a few items that can make estimated taxes less painful. Number one, separate your tax savings. Consider moving money regularly into a separate account. Even if you can't perfectly predict your tax liability, setting money aside can help prevent and ease the tax bill. Number two, keep your accounting current. Your books aren't just for your tax return. They're how you understand what's happening in your business. You can't make informed decisions based on numbers you don't have. Number three, make tax planning part of your routine. Don't wait until your tax return is being prepared to discover that your income changed dramatically. A tax projection or planning conversation during the year can help you see where you're headed. Number four, review your numbers consistently, not once a year during panic season, regularly. Know what's coming in, know what's going out, and understand how your business is performing. And finally, ask questions earlier. Most tax issues don't happen overnight. There are usually opportunities to address them long before the return is filed. The sooner you ask the question, the more options you may have. Sometimes a 30-minute tax planning conversation in June, in August, September, or another appropriate time during the year can prevent a surprise later. Now it's time for the cynical CPA says Estimated taxes aren't trying to ruin your life. They're simply part of how the tax system collects money throughout the year. But here's what I will say. Don't confuse having money in your bank with having money available to spend. Some of that money may already have a job for taxes, for expenses, for payroll, and for future obligations. And if you're constantly surprised by your tax bill, that may not be a tax problem. It may be a planning problem. And that's a very different thing. Estimated taxes are one of those realities nobody really prepares you for when you leave a traditional job and start working for yourself. But they don't have to be scary. The goal is to understand what you're likely to owe, plan for it, and avoid being blindsided when the tax bill comes due. Because here's the thing, taxes aren't the problem, being surprised by them is. And this is what the Cynical CPA is about. Real conversations about topics that might not have been explained to you when you started your business. And if you're a business owner or individual who needs help making sense of your numbers, that's what I do through XAct Accounting Services. I work with small businesses, entrepreneurs, and individuals providing accounting, bookkeeping, tax prep, and tax planning services. Whether your books need some attention, you're trying to understand what your numbers are telling you, or you want to plan ahead instead of being surprised at tax time. Sometimes you just need someone who can look at the whole picture with you. You should be able to understand your numbers, make informed decisions, and have a professional you trust to help you navigate the rest. Thank you for listening to the Cynical CPA. If you enjoyed this episode, make sure to subscribe, share it, and follow along for more honest conversations about accounting, taxes, and everything in between. I'm Corrine Hasbony, CPA and Enrolled Agent. And until next time, remember, don't fear the numbers. Understand them. Thanks for listening to the Cynical CPA. If you like what you heard, make sure to follow for more real talk about accounting, taxes, and everything in between. No fluff, no sugarcoating, just straight talk and clarity because someone has to say what your accountant is really thinking. Until next time, remember numbers don't lie, but they do need a translator and that's where the Cynical CPA comes in. If you're ready to stop guessing and start gaining clarity in your numbers, head to xactaccountingservices.com and click on Let's Connect.