Now that tax season is winding down, you might think you’re in the clear. After all, you’ve filed your tax return and paid your federal taxes. However, you might not be done pay yet. If you are a business owner, you might still need to pay state taxes and make a quarterly tax payment.
Paying Your State Taxes
Every state is different. I’ve lived in states that don’t collect taxes until tax day, and others that require you to make quarterly tax payments along the way. Make sure you understand the requirements in your state so that you don’t end up in trouble later on for not paying your taxes.
It’s also important to understand the ways that your state allows you to pay. I would like it if my state allowed me to pay my taxes online, but it’s not an option. I have to mail my tax payment in the old fashioned way, or bring it in by hand.
When I first started as a business owner, I forgot about state taxes and had a rather unpleasant situation. I ended up signing up for my state’s installment plan in order to avoid even more penalties. As you plan to set aside money to pay your federal taxes, don’t forget about paying your state taxes.
Quarterly Estimated Payments
Another mistake I’ve made in the past is forgetting that I need to make my first estimated quarterly payment on tax day, along with whatever I owe from the year before. For the first few years of my business, I regularly owed money for taxes. As my business grew, quarterly payments based on the year before weren’t enough to cut it. So, I usually still owed money on tax day.
However, when paying my bill from the year before, I often felt like I should be done. As a result, I sometimes missed making my first quarterly payment and had to make up for it throughout the rest of the year. It’s important to remember that what you underpaid last year is different from what you owe this year for your first quarterly tax payment. If you owe from last year, you will need to make two different payments.
Now I plan ahead when preparing to pay my taxes each year. Based on my most recent tax bill, I divide the total amount (federal and state taxes) by 12 and set aside money each month in a special account. When it’s time to make a federal quarterly payment, the money is transferred into my business checking account and I send the money in. The rest of the money sits in the account until it’s time to make a state tax payment. I like using an account with yield so that I can at least get a little extra in interest, even if it’s not a ton.
Carefully look ahead to what you are likely to pay in taxes each year. It can require some tweaking each time, but it’s an important part of staying ahead and making your payments without breaking the bank.