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Hey, it’s Donna Bordeaux with Calculated Moves . Let’s talk estimated payments for a moment. If you are a business owner who earns income outside of a standard W2, you may be required to make estimated payments. If you have a W2 and some other circumstances where you have outside sources of income, you also may be required to make estimated payments. There’s a lot of confusion around these. So let me give you the down and dirty. First off, estimated payments sound really severe. The IRS says, you’ll get a penalty. If you don’t make your estimated payments, the penalty is in effect interest for not giving them their money throughout the year. So, as an example, if you owed $10,000, when you filed your tax return, you may have to pay an estimated penalty for not giving the IRS their money all throughout the year. When you actually earn that money, there’s a lot of complicated calculations that go behind this.
But whenever we file a tax return where the balance due is more than a thousand dollars, we automatically calculate estimated payments for you. Now, what you really need to know is those estimated payments are calculated based on your prior year income. So let me give you a situation. I just ran across a client, lived in a different state in the previous year and calculated estimated payments. They had to pay them every year when we did their return. They still lived in that state for the prior year. So it automatically calculated estimated payments for them. However, they no longer live there. They should not make estimated payments for the current year because they would have any income there. So the estimated payments are always calculated based on the prior year’s income. When they’re generated with your tax return. Now you can go through and do some estimates and changes to look at what your actual income is for the current year and make estimated payments based on that.
But estimated payments are not a requirement. Now let me further explain that they’re not required in that. You don’t have to pay them. They’re not going to come put you in jail. If you don’t pay your estimated payments, however, you may have to pay an estimated penalty. And that is purely interest for not paying throughout the year. Now the interest rate at the IRS varies from year to year, but it’s actually a pretty low rate. It’s around 5% on average. So if you have credit card bills, other debts, things that are at a higher rate, you may want to hold onto your cash. Also keep in mind that if you make an estimated payment, the first quarter of the year and all is going well, super great income, but towards the end of the year, you make a dip and something drastic happens in your business.
Cash flow tightens up. Guess what? You can’t call the IRS and ask them for that money back. So in many cases, we are suggesting to our business owner clients that cash is King hold onto that money. And yes, be willing to pay that estimated payment because it’s pretty cheap from an interest rate perspective and the protection that it gives you to have the cash flow, to grow your business and protect yourself all throughout the year. So if you have questions about estimated payments, please don’t hesitate to let us know. It is a very confusing topic, but for the most part, know that you don’t have to make them, but don’t run out and spend all the money. So you don’t have the money to pay your liability, come April, or whenever your taxes are due. All right, I’m Donna Bordeaux with Calculated Moves . Thank you very much. And please subscribe to our YouTube page and donut. Don’t miss out on following us on Facebook. We’ll keep you abreast of all the latest news and great information. Have a great day.
Donna Bordeaux, CPA with Calculated Moves
Creativity and CPAs don’t generally go together. Most people think of CPAs as nerdy accountants who can’t talk with people. Well, it’s time to break that stereotype. Lively, friendly and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs. They’ve owned businesses and helped business owners exceed their wildest dreams. They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.