You may need to file quarterly tax estimates if you are self employed, retired, have a side job or don’t withhold enough income taxes through your job or pension.

Failing to send in estimates could result in a penalty if you expect to owe $1,000 or more when you file your return.

To avoid the penalty for not paying enough estimated tax, you need to pay in at least 90% of your 2009 tax liability or 100% of your 2008 tax liability, whichever is less.

Alternatively, you can choose to file and pay your 2009 taxes by January 31, 2010 to avoid any underpayment penalties.

Use Form 1040-ES to submit your estimated tax payment.

For a refresher on estimated tax payments, see ‘Do I Need to Make Estimated Tax Payments?’

Related Posts:

• Final Tax Estimate for 2008 Approaching Quickly
• Don’t forget your third quarter tax estimate!
• Year End Tax Tips

This estimate goes towards your 2008 tax liability so it reduces the amount you will owe on your 2008 tax return when you file.

To avoid the penalty for not paying enough estimated tax, you need to pay in at least 90% of your 2008 tax liability or 100% of your 2007 tax liability, whichever is less.

Alternatively, you can choose to file and pay your 2008 taxes by January 31, 2009 to avoid any underpayment penalties.

Use Form 1040-ES to submit your estimated tax payment.

For a refresher on estimated tax payments, see ‘Do I Need to Make Estimated Tax Payments?’

Related Posts:

• Savers Credit Helps Low to Middle Income Taxpayers Save for Retirement
• 3rd Quarter Tax Estimates Due Today!
• W-2s and 1099s Due Monday!

Most people probably aren’t thinking about taxes yet, but the time to do tax planning is before the year ends.  Once December 31 has passed, there’s very little you can do to help reduce your 2008 taxes.

The first step in tax planning is to determine where you are for the year.  Pull out last year’s tax return for a reference.  You also need your most current profit and loss statement, so if your books aren’t up to date, now’s the time to get caught up.

Compare your income and expenses to last year’s tax return.  Is your income up?  Do you have the same amount of deductions as last year?  If your income is up, or if your expenses were down, you may owe more taxes than you did last year.

If you are a small business owner you should be very familiar with estimated tax payments.  Have you paid in enough taxes to avoid the under-payment penalty?  The general rule of thumb is that if you expect to owe a balance due of $1,000 or more, after all of your payments (from withholding, tax credits, etc.), then you need to make estimated tax payments.

Once you have compared your current year income and deductions to last year’s tax return, where do you stand?  Do you have more taxable income this year?  If you do, then you can defer income or accelerate expenses to reduce your taxable income for the year.  Just remember, these strategies will likely increase your taxable income for the following year; your tax plan should be long-term, not just for the current year only.

Defer Income:  One way to reduce your current year taxes is to defer income.  If you are a small business owner, you have more control over this than wage earners do.  If you have accounts that you expect to bill in the last week or two of December, consider delaying your invoicing until the last few days of December or even the first few days of January.  Cash basis taxpayers report income when it’s received, so if you invoice a customer on December 28, and you don’t receive payment until January 2nd, then the income will be reported on the next year’s tax return instead of the current year.

Accelerate expenses:  Another way to reduce your taxes is to pay expenses ahead of time.  If you can see that your income is higher this year and you want to minimize your taxes, determine which expenses you can pre-pay before the end of the year to reduce your taxable income.  Some examples include your rent, insurance, utilities, or other invoices you receive at the end of the year that aren’t due until after December 31.  Also, consider stocking up on supplies, inventory, or other items you’ll need to purchase soon anyway.  Do you have any plans to upgrade your equipment or computers?  Consider doing those before the end of the year as well.

Another way to minimize your taxes is to fund your retirement account.  As a small business owner, you have a number of options including traditional IRAs, SEP IRAs, Simple IRAs, or 401K plans.  Determine which plan is best for you and fund it before the due date (this is the one strategy that doesn’t have to be done before the end of the year).

This is just a basic guideline for year-end tax planning.  To determine the strategies best for you and your small business, discuss year-end tax planning with your tax professional.  But don’t wait too long… the year will be over before you know it!

Resources:

Tax Planning & Estimates
The New Biz Tax Consultation

Related Posts:

• Obama’s Proposed Tax Cuts Total $300 Billion
• December 31st Is The Last Day for Most Tax Planning Strategies
• Savers Credit Helps Low to Middle Income Taxpayers Save for Retirement

If you just started your business, you may not be aware of how tax estimates work.

Basically, in the United States, we operate on a pay-as-you-go tax
system.  That means you pay taxes as you earn income throughout the
year.

If you are an employee, you pay taxes through withholding.  If you
are self employed, you pay taxes by making estimated tax payments.

The general rule is that you must make estimated tax
payments if you expect to owe at least $1,000 in tax for the current
tax year, after subtracting your withholding and tax credits, AND if
you expect your withholding and tax credits to be less than the
smaller of:

• 90% of the tax liability on your current year
  tax return, or
• 100% of the tax liability on your prior year’s
  tax return

Generally, you will estimate your tax liability for
the entire year and divide that amount by four to determine your
quarterly estimated tax payments.

The due dates for quarterly estimated tax payments are April 15,
June 15, September 15 and January 15.  If the 15th falls on a weekend
or a holiday, the due date is the next business day.

It’s important to send the right amount in at the right time to avoid interest and penalties.

For help estimating your quarterly estimated tax payments, check out How to Pay Estimated Taxes, or contact Kristine for tax planning/estimates today.

Related Posts:

• 3rd Quarter Tax Estimates Due Today!
• Final Tax Estimate for 2008 Approaching Quickly
• Year End Tax Tips