Reflection of the Week
Tips for Wednesday’s Estimated Tax Deadline
Happy Friday, all. And happy new year!
I hope you had a restful and restorative holiday. If you’re like me, this first week back has been jarring, so I’m happy we’ve made it to Friday.
The beginning of the year begins the 2025 tax season. And the first deadline for business owners is Wednesday’s estimated tax deadline. So whether you’re a seasoned entrepreneur or new to managing quarterly taxes, this guide will walk you through the essentials: estimated taxes, how to calculate them, and how to pay them.
What Are Estimated Taxes?
Estimated taxes are payments made quarterly to the IRS and, in some cases, your state tax authority. They apply to income not subject to withholding, such as self-employment earnings, interest, dividends, rental income, or capital gains. For business owners, this includes your profits after deducting expenses.
The IRS requires estimated tax payments if you expect to owe at least $1,000 in taxes after accounting for withholdings and refundable credits. These quarterly payments help you avoid a significant tax bill at year-end and prevent underpayment penalties.
January 15 marks the fourth and final estimated tax payment deadline for the 2024 tax year. Timely payments ensure you remain compliant and set you up for a smoother tax season.
How to Calculate Estimated Taxes
Calculating your estimated taxes involves these three key steps:
- Estimate Your Total Income for the Year
Start by determining your gross income from all sources. If you’ve been keeping up with your books, you should have a full year of business income and expenses. Don’t forget additional sources of income like W-2 income or investment income. - Determine Your Taxable Income
Subtract deductions and credits to find your taxable income. If you’re self-employed, don’t forget to account for the self-employment tax, which covers Social Security and Medicare contributions. I use tax projection software to do this, but you can also find free tax calculation software online. - Apply the Tax Rates
Use the IRS tax brackets for your filing status (e.g., single, married filing jointly, married filing separately) to calculate your federal tax liability. Add state taxes if applicable.
To avoid penalties, aim to pay either:
90% of your current year’s total tax liability, or
100% of your prior year’s tax liability (110% if your adjusted gross income was over $150,000).
Tools like the IRS Form 1040-ES and online tax calculators can help with this process.
As a shortcut, I start withholding 15% of business owners’ gross income to cover the taxes. But if you don’t have a lot of business expenses or have a higher income, you’ll likely need to increase that percentage.
How to Pay Estimated Taxes
Paying your estimated taxes is straightforward. Here’s how:
- Electronically
Use the IRS Direct Pay service to pay directly from your bank account.
For a fee, you can also pay via credit or debit card through authorized payment processors. - By Mail
Complete the payment voucher on Form 1040-ES and mail it with your check or money order to the appropriate IRS address. Ensure your payment is postmarked by January 15. - Through Your Tax Software
Many tax preparation platforms allow you to calculate and submit estimated tax payments seamlessly.
Remember, timely payment is key to avoiding penalties and interest charges. The tax payment dates are the same every year. So consider setting up reminders for future estimated tax deadlines: April 15, June 15, and September 15.
Final Thoughts
Preparing for the January 15 estimated tax deadline doesn’t have to be stressful. By understanding estimated taxes, accurately calculating your liability, and submitting timely payments, you’ll stay on top of your financial obligations and maintain a strong foundation for your business. If you’re unsure about your calculations, consult a tax professional to ensure compliance and maximize your financial health.
Questions of the Week
- Have you finished reconciling your books for 2024?
- Have you tracked your previous estimated payments?
- What else do you still need to prepare to file your return?
Tool of the Week
If you’re overwhelmed with calculating your amount, pay your estimated taxes based on your liability from 2023. You can at least avoid the underpayment penalty if you pay 100% of your prior year’s tax liability or 110% if your adjusted gross income is over $150,000). It’s better to pay something than nothing at all.