Like all small business finance questions, this one is loaded. There is just no easy answer or magic solution to small business accounting questions and problems because no two small businesses are the same. But, you asked, and our experts answered.
Should I pay my taxes throughout the year? Or wait til year-end?
The IRS requires you to estimate your tax liability and to make payments throughout the year. But, that might not even be the best reason you should make sure to pay your taxes throughout the year. For example, would you rather pay a $300 tax bill every month? Or a $3600 tax bill at the end of the year? I think we all recognize that it is much easier to make small payments over a long period of time, rather than one huge payment all at once. Here’s a little more detail…
If you end up owing the IRS over $1000 at year end, they will charge you a “late payment” penalty. However, the late payment penalty is the smallest one that the IRS has to dish out…equaling one half, of one percent per month, multiplied by any taxes due on the tax return. So if you ended up owing nothing on your tax return, then there would be no penalty.
If you are a W2 employee, you don’t have to think about making sure your taxes are paid in…your employer does it for you. But, if you own your own business, then you do need to find a way to get the taxes in.
If you are a W2 employee of your own business, then you must make sure that your are paying yourself a reasonable wage and withholding the necessary payroll taxes from your paycheck. These taxes need to be paid in every pay period, every month, or every quarter, depending on the tax payment schedule you are on.
If you are not a W2 employee of your business, for example a sole proprietor or LLC owner, then you’ve got to send estimated tax payments into the IRS each quarter. The amount of the payments depend on how much money you think you will make during the year. As long as you pay in enough to owe less than $1000 when you file your return, no penalty will be assessed.
