Guide to Estimated Tax Payments and the Profit First Approach

Note From Larissa for Donna

It’s that time of year again. Estimated taxes for the third quarter are due for many individuals and businesses. On September 15th, 2023, it’s crucial to make this payment so we can ensure we are not using our tax money for operating costs. If you are struggling to make these deadlines, consider allocating income to a bank account as suggested in the Profit First system.

Estimated taxes allow us to prepay our income taxes to the IRS and state tax authorities. There are many advantages to doing this, such as paying in smaller amounts instead of a larger sum at the end of the year, and avoiding spending it on operating expenses. Note that these payments are an estimation and not the final amount due, so the 4th quarter tax payment may be larger or smaller depending on the payments made throughout the year.

The good news is that not everyone is required to pay estimated taxes. You are expected to make estimated tax payments if you anticipate owing at least $1,000 in federal income tax when you file your return. Other conditions that may require estimated tax payments include:

• You are self-employed or have significant income from a business.
• You receive income from investments, such as dividends, interest, or capital gains.
• You earn money through the gig economy or freelance work.
• You do not have enough taxes withheld from your paycheck.

Failure to pay estimated taxes when required can result in penalties and interest charges. Below is a step-by-step guide on how to calculate and file your estimated taxes.

Steps to Calculate Estimated Tax Payments

1. Estimate Your Income: Add up all your sources of income for the year, including salary, self-employment income, rental income, investment income, and any other sources.
2. Estimate Your Deductions: Determine your eligible deductions, such as business expenses, mortgage interest, medical expenses, and charitable contributions.
3. Calculate Your Taxable Income: Subtract your deductions from your total income to determine your taxable income.
4. Determine Your Tax Liability: Use the current tax rates to calculate your estimated tax liability based on your taxable income.
5. Account for Withholding: If you have taxes withheld from your paycheck, subtract this amount from your estimated tax liability.
6. Divide by Four: To determine your quarterly estimated tax payments, divide your estimated tax liability (after withholding) by four, since you’ll make four payments throughout the year.

Ways to Make Payments

1. Online Payments: Use the Electronic Federal Tax Payment System (EFTPS) to make payments electronically.
2. Direct Pay: Pay directly from your checking or savings account using IRS Direct Pay, with no fees.
3. Credit or Debit Card: Payments via card are possible, though processing fees may apply.
4. Check or Money Order: Mail a check or money order with the IRS payment voucher. Allow sufficient time for delivery.
5. Third-Party Tax Software: Many tax software programs allow you to make estimated payments directly through the platform.

If you need additional help, contact your tax professional or accountant as soon as possible. If you do not have that support network set up, contact Sooter Consulting—they will be there to help.