So you’ve realized that you should be paying estimated tax payments throughout the year. (Not sure if you should be? Here’s a post to help you figure it out!)
The next question then becomes: “How much should I be setting aside for those payments?”
Well, that, my friend, is the perpetual question, and I’m going to give you oh so unsatisfactory answer of “It depends”.
(Don’t you hate it when people do that?)
But just because “it depends” doesn’t mean I can’t help! I can absolutely guide you in a direction that makes sense for you, your business, and your household.
(Because remember: your total tax bill – and thus your estimated payments – depend not just on your business profits, but on your income as a household. Even if you’re a household of one! That includes biz profits, W2 income, interest & investment income, etc for both you and your partner, if you’re married.)
How to much to save for estimated payments depends on:
How much profit you’re bringing in (note: I said PROFIT, not REVENUE. (If you need a reminder on what’s what, here you go!)
If you or a partner also have “regular paycheck” jobs and, if so, how much you’re having withheld from each paycheck
If you or a partner also have other income (ex: if your partner (if you have one, also has a business, if ya’ll have rental income, investment income, etc)
If your state has an income tax
For a general rule of thumb: set aside 15 - 30% of your PROFITS for tax purposes.
Hold aside an amount on the lower side of that scale (15% - 20%) if:
You’re making a bit less
You have a partner who has a regular paycheck job and they have lots of withholding
You simply need the cash for, you know, paying bills and keeping the dog fed.
You live in a state with no income tax.
Hold aside an amount on the higher end of the scale (25% - 30%) the points ahead don’t apply to you.
Want a handy dandy little calculator to help with the math? I’ve got you!
Where should I put the money I’m saving?
Again, it depends. But wait! This time it depends much less on your income/profit levels and much more on your personality.
Let me ‘splain:
👉🏻 If you’re using YNAB for your business budget (link to (possible future) blog post) and have earmarked the funds for estimated payments, you can simply leave the money in your regular checking account. Because you no longer use your bank account balance to decide how much cash is available to you, you won’t have to worry about spending those “saved for estimated payments” funds on something shiny.
👉🏻 If you’re NOT using YNAB (or profit first, or some other budgeting system), I’d suggest opening a savings account and putting the funds in that account. That way it’s “out of sight, out of mind” and you’ll be FAR less tempted to dip into those funds.
Note #1: The savings account doesn’t need to be an official account in the name of your business. It can simply be a personal savings account that you use ONLY for estimated payments.
The upside of putting the funds in a savings account is that that money will earn interest. It may be a little, it may be a lot, but every penny counts!
Note #2: If you’re using YNAB and have no need to put the funds into an “out of sight, out of mind” account, you STILL might want to put them in a savings account (that you connect to YNAB). Because light I mentioned above: interest is a THING, and most checking accounts (especially business checking accounts) don’t pay interest.
When do I submit the estimated payments?
Now that you’ve saved the cash, when do you send it to the IRS?
Finally, an easy one!
Estimated payments are due 4 times a year. (They aren’t technically due “quarterly”, because that implies every 3 months. And as you’ll see the payments aren’t spread evenly throughout the year. Do I understand why? Yes. Does it irk my sense of symmetry and love of patterns? Yes, yes it does!)
For Income earned between January 1 and March 31, your estimated payment is due by April 15 (tsame day as your taxes!).
For income earned between April 1 and May 31, your estimated payment is due by June 15.
For income earned between June 1 and August 31, your estimated payment is due by September 15.
For income earned between September 1 and December 31, your estimated payment is due by January 15.
Note: if any of those due dates fall on a weekend or Federal holiday, the payments are due the following business day. This tends to happen pretty regularly with the payment due on January 15, as that’s the date MLK Day often falls on.
Hopefully that helps answer your questions about estimated payments and puts your mind more at ease.
A final note:
As usual with all things taxes, my usual disclaimer applies: The amount of tax you owe (and thus the amount you should be paying in estimated tax payments) depends on multiple factors, including tax deductions, marital status, tax credit, dependents, and others. Work with a qualified tax professional to get a personalized calculation for your situation.
