If you’re self-employed or a business owner, chances are one of the biggest gripes you have about your job is filing taxes. Since you don’t get them taken out of your paycheck as an employee would, you have to figure out taxes all on your own.
Choosing the right accounting software can help you estimate your taxes, but you’ll still have to go through the process of paying them. If you’re a freelancer, independent contractor, or single business owner, you have to pay your estimated taxes every quarter in addition to filing your taxes annually. Luckily, it’s not as tricky as it might sound. Here are 5 tips to make filing your quarterly taxes a breeze.
1. Keep Your Business and Personal Finances Separate
Separating your business’s finances from your personal finances throughout the year is the first step to successfully filing your quarterly taxes. If your finances are all mixed together, it can be nearly impossible to identify all of your business expenses and maximize your tax deductions.
Worse, if you end up getting audited, you may have trouble providing proof of your claims if your business finances are mingled in with your personal. Keeping your business finances well organized can also reduce your risk of being audited in the first place, as your taxes are more likely to be accurately filed.
Whether you’re running a corporation or you’re a sole proprietor, it’s wise to open a business bank account. This account will limit your personal liability in addition to keeping your business’s finances in order. You can also open a business credit card for your business expenses; the right one might even earn you some lucrative rewards.
2. Track Your Income and Expenses
Once your finances are separated, it’ll be easier to keep close track of your invoices and business expenses. You’ll need thorough records of both revenue and costs to estimate your taxes each quarter, and keeping these records will help you audit-proof your business. Make sure to categorize your expenses and keep receipts so you can make deductions properly.
The best solution for this step is to get a business or self-employed accounting software that can pull out your income and expenses from a linked bank account and help you automatically add up your income and categorize your expenses. With a program like Sunrise’s Tax Assist, you can track your daily, weekly, monthly, and yearly income while managing your business expenses. Tax Assist also keeps your important documents, such as 1099 forms, all in one place, making it easier to file your taxes.
3. Calculate Your Estimated Quarterly Taxes
The best way to do this is to use a program like Tax Assist that helps you estimate how much you’ll owe in taxes each quarter based on your income and expenses. If you want to do it yourself, you’ll start by figuring out your taxable income. This number is your gross income minus any deductions you’re eligible for.
Once you have your taxable income, you can use IRS form 1040-ES for individuals or form 1120-W for corporations to calculate your estimated taxes. This amount will include your income tax as well as a self-employment tax of at least 15.3%. Divide your annual tax burden by 4 to calculate your quarterly taxes.
4. Pay Your Estimated Taxes By the Deadline Each Quarter
Quarterly estimated taxes for 2020 are due on April 15th for the first quarter, June 15th for the second quarter, September 15th for the third quarter, and January 15th of the following year for the fourth quarter. If you fail to pay your estimated quarterly taxes by the deadline each quarter, you could face a penalty from the IRS.
You can pay quarterly taxes online through the IRS payment system or by mailing your tax forms to the IRS.
5. Anticipate Changes in Your Income or Expenses
Few businesses have consistent income and expense levels from quarter-to-quarter. You’ll want your quarterly estimated taxes to reflect your business’s finances each quarter. Otherwise, you could end up underpaying or overpaying, both of which can trigger a penalty.
You can do this by anticipating major changes to your income or expenses and saving money for your tax payments accordingly. If you know you’re going to sign on a major client or lose a major client, take that into your bookkeeping.
This process is where a good accounting app can come in handy. Tax Assist’s tax estimator, for example, responds to your income and expenses in real-time, so as your income increases, you’ll see your estimated tax burden increase as well. By staying financially prepared, you can make sure you’re never caught off guard by your tax bill.