Freelancers and small-business owners alike are required to make quarterly estimated tax payments. If you’re in this boat, you’ve probably noticed that Q1 estimated payments have the same deadline as the tax return for the previous year. If you owe more tax for the previous year, plus an estimate for the current year, this date can loom large on the calendar.
Fortunately, you can take steps to make these tax payments go smoothly. A good tax accountant can prepare your quarterly forms to send with estimated tax payments. Additionally, he or she can help complete tax returns on time so your estimated tax forms are ready when the first payment is due.
To estimate your tax for this year, your accountant can use the prior year as a guideline. In fact, the IRS permits you to avoid an underpayment penalty by paying estimated tax payments the current year that are equivalent to your tax from the prior year.
A byproduct of this “safe harbor” method is that you might eventually owe more tax (without penalty) if profit is higher in the current year than it was in the previous year.
To avoid this additional payment in Q1, your accountant can use an alternative process of estimating this year’s tax by projecting current-year profit. This makes accurate current-year records essential, so an optimal forecast of this year’s profit can be made. This includes up-to-date tracking of business revenue and expenses. In other words, don’t wait to identify your profit for this year until the tax return is due next year. Remain in regular contact with your accountant in order to manage these numbers and avoid surprises at the end of Q1.