Estimated tax payments for the small business owner: Who, What, When, Where…

Here are the 5 W’s, some H’s, and some pro tips related to estimated tax payments and penalties.

Why do I have to pay estimated taxes?

While you were swimming blissfully in predictable cash earnings and forty-hour work weeks (i.e. an employee for someone else’s company) most if not all of the income tax you were expected to owe for your wages was being withheld and paid to the Fed and State on your behalf (on time). Now that you are working twice as hard for half the pay and wearing too many hats already, Uncle Sam is making you responsible for paying these estimated taxes on your business earnings (quarterly) because he does not want to wait until April 15th to collect.

Who pays the tax?

Whether you are self-employed, a managing partner in a partnership, or an employee of your own corporation, if your business is making a profit (i.e not losing money) then there is a high likelihood that you should be making estimated tax payments on either self-employment income, ordinary income, or both.  

PRO TIP - If you have a profit on your business then you might owe self-employment tax even if your taxable income is zero on your 1040.

To reach the largest audience and keep things simple, this article will focus on Single Member LLC owner / members and sole proprietors.

The tax from a single member LLC or a sole proprietorship (or any ‘flow-through’ entity) is assessed on a personal/individual level.  This means that you as an active LLC member, business owner, or participating partner are responsible to make payments for your share of the company profit.  

What is taxed?  The profit that your business ‘flows through’ to you for any given tax period is subject to ordinary income tax and most often self-employment tax.

PRO TIP -  Because you do not get a deduction for what you pay yourself, your tax will stay the same if you leave the cash in the business bank account or take it out to pay yourself with it. 

To be noted, If you are a partner in a partnership or a shareholder in a corporation, there are differences in the way that distributions and dividends are taxed. 

When are the due dates of the estimated payments?

April 15th for Q1 (Jan – Mar)

June 15th for Q2 – (Apr - May) ** only 2 months

September 15th for Q3 – (Jun – Aug)

January 15th of the following year for Q4 – (Sep – Dec) – Pay as much as you can before this date to minimize the failure to make estimated tax payments penalty!

Where can I pay the estimated taxes, online?

You can use and (for Mass residents) MassTax Connect to make online payments.  You can also ask your tax accountant to prepare vouchers for you when he or she is preparing your taxes or get the vouchers online by searching for 1040-ES (make sure you get the right tax year) and your applicable state vouchers.   

PRO TIP – Estimated payments from your sole proprietorship, LLC, Partnership, and S-corporation profits should be made from your personal bank account.

Why should I pay them? 

You won’t go to jail if you don’t pay estimated taxes on time (or at all) but a few things can happen. 

One thing that can happen is penalty; form 2210 calculates it but following this form can be tough.   The easiest rule of thumb is 2.66% of your annual underpayment (this method applies if you made no estimated payments for the year).   

Another thing, If you are in an installment agreement or involved with an offer in compromise with the IRS for past due taxes then a failure to make estimated payments can jeopardize these agreements or applications.

How can I estimate my tax liability?

There are many variables to the amount of tax due (think tax brackets and itemized deductions) that can create complexity when calculating estimated taxes.  It gets more complicated the more money you make (like if you are maxing out Self-employment taxes) and there are often other factors (like W-2 wage over/under withholding or rental property income) to consider.

To get in the ballpark for estimated tax, you should know your income sources and estimated tax bracket.  If you think that your business income is going to be in the 25% tax bracket (perhaps because of your spouse’s income) then it may be reasonable to stash away 40% for Federal and State taxes.

How much is the minimum that will keep me out of penalty and How do I know if I need a tax professional?

If you are going to make more money than last year then you can pay 100% of what you had to pay last year or 90% of what you think that you are going to owe this year, divided by 4, on the due dates of the estimated payments.  This will get you into a “safe harbor” to avoid penalty.  It follows that you should have some liquid cash for the additional tax you will need to pay on April 15th. 

If you feel like your taxes are going to be significantly less and you have better things to do with your cash then earn 0% interest from the government (like grow), then talking to a tax professional would be a good choice. 

Lyle Phipps, CPA

for Prepared Accounting PC

Using Traditional and Roth IRAs - Tax timing for small business owners

We know you should be saving for retirement and you know that there are (way too many) options. Your co-working space neighbor even said that she opened an IRA online and it was super easy, so you smile, nod, and commit to check it out because it is a step in the right direction.  Wait, but what is an IRA actually?  Are you even eligible? Which one should you choose?  Like most things in the US tax world and small business the answer is, “it depends”.  Like a philips or a flat head screwdriver each IRA fits the tax screw in a slightly different way.

Here is the nutshell version.  An IRA is a retirement account that should have a tax benefit. Tax money saved is just like money earned now or later and we all like to earn more money (especially easy money). The tax benefit either comes now (Traditional) or later (Roth). As a general rule everybody can contribute the smaller of $5500 or their taxable compensation each year to either Roth or Trad (or a combination of both).  If you do make too much for either one than there are tricks that add steps but work to get you the same or similar tax benefits (at least as of the date of this article).

Traditional IRA – The Trad IRA reduces your tax NOW with a current period deduction so it is akin to the pre-tax deductions for your old 401(k) or 403(b) retirement plan when you were employed.  However, now that you are self-employed, you actually see the money first then you contribute the bucks just before the filing deadline and get an immediate tax bang in the form of a reduced tax bill. Oh. Yeah. Your $5500 contribution now only cost $4,125 if it works the way it should (assuming 25% tax bracket).

You only getting this tax benefit if your income is low enough to allow your contribution to be deductible (link here), this means it shows up on your tax return front page as an adjustment to your income. This adjustment makes it the right tool if your goal is to keep your AGI low for any reasons (like tuition or financial aid).  However, if you can’t deduct the contribution than you should not use a Trad because you are losing the tax benefit

PRO TIP:  Because you are a small business owner you can get an immediate tax benefit by using another “tax deferred" style of retirement account (like a SEP) that will duplicate the traditional IRA benefits while you use your annual IRA allowance to cash in on Roth benefits. 

Roth IRA – With the Roth you get nothing now but you keep everything later.  You pay the tax on $1000, put it in the Roth, let it grow for 30 years, then take out $3000 totally tax free when you retire.  We don’t know what the tax rate will be in 30 years but you won’t be paying it.

HISTORY: Senator William Roth had an idea to boost the Federal budget by reducing the use of traditional IRAs so that the government would be able to spend tax money sooner than later.  Favorably to you, it worked. Now the government will now have to pay you by giving up the tax when you retire because all those earnings (growth, dividends, etc.) will be coming out of your Roth and filling your sails (tax free) while you watch the sunset shine through Old Glory waving behind your sailboat. 

 A benefit to having tax free income when you retire is that you might just keep more of your Social Security income free from tax.  A little more history tells us that ALL Social Security used to be tax free but then the changed it to “save social security”.  Now, if your other income is more than $34,000 on a single return or $44,000 on a joint return, up to 85% of your benefits could be taxed.  We won’t speculate (here) what it is going to take to “save social security” once the silver tsunami baby boomers have been collecting for a few years.

If you are considered a high-income earner and your Roth allowance starts to phase out at $118k and once your AGI reaches $133k then you are not allowed to make direct Roth contributions.  This is where the Back-Door Roth comes in handy. 

Back-Door Roth – This little tax trick allows those who earn more than the Roth AGI limits (and pay more taxes) to avoid being discriminated out of their $5500 annual IRA allowance.  This can be done because there is no income limit when you convert Traditional IRA funds into a Roth IRA funds.  So, by making an otherwise lame duck non-deductible traditional contribution with your allowance and immediately converting it to a Roth you get your annual gift with a little tax swagger.

PRO TIP: Combinations. Speaking of saavy, if you know what income level you are shooting for than you can tailor your tax return with Traditional IRA contributions and take the rest in Roth.  For example, if you kid’s school gives you a 20% tuition discount if your AGI is $50k or under and you make a $55k salary, you can contribute $5k to your Traditional and $500 to your Roth.  Now you have your tuition discount AND your full $5500 annual gift from Uncle Sam. Cha-Ching!

Summary – It is never too soon to start saving for retirement so try to use some or all of your annual IRA allowance even when it feels like you need the cash as a security blanket for your new business. Talk to a lender about emergency options and a tax adviser to see if you can get the best of both worlds to balance the need for cash and the need to invest.  Spend the time to plan and allow your business to pay you (for your IRA) first to feel more stable during the ups and downs of small business ownership.

When Can I Deduct Mortgage points?

It is easy to get confused about mortgage points.  They have different names like discount fee or origination fee and a lot of tax preparers and lenders might simply say that they are not deductible perhaps missing out on a tax planning opportunity to accelerate this valuable deduction in the current year. 

The General rules are that the points are amortized (deducted over the lifetime of the loan) HOWEVER the exception*** is generally applicable to consumer lending when the IRS multi-prong tests are met.  This flow chart (see below) is very helpful and summarizes the tests that allow for full deduction in the year paid.

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Massachusetts Community Investment Tax Hack

Looking for an opportunity to be charitable this holiday season? Get a wicked tax bang for your benefactor buck while investing in a (Massachusetts) local community.  

Here is how:

Take Beacon Hill up on their Community Investment Tax Credit offer.  It pays big because In addition to the Federal tax deduction for charitable contributions, you (a Massachusetts taxpayer) also get a 50% Massachusetts tax credit if and when you give to one of these award winning local community development programs. (e.g. Franklin County CDC)

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No more Sales Tax Holiday in Massachusetts for 2016; Mauling your Main St. business

Massachusetts legislature failed to establish the sales tax holiday that retailers have seen for 11 of the last 12 years.

Only once during the recession of 2009 did the holiday not encourage summertime main st. retail sales in the Commonwealth of Massachusetts.  

Jon B. Hurst, president of the Retailers Association of Massachusetts said, “To not authorize these two days would be both economically and politically shortsighted,”.  The holiday, he said, is “about keeping struggling Main Street in business at a time when tax-free mobile commerce is increasing at alarming rates.” - Credit to Joshua Miller of the Boston Globe for the quote.

Massachusetts sales tax is 6.25% on most retail items (the exceptions are listed here) and the Department of Revenue has estimated that the two day holiday can cost the state as much as 25.5 million in forgone revenues.  Amazon and other major online retailers do collect sales tax so this may be partially true but it may be overstated.   

What we do know for certain is that  Massachusetts retailers DEFINITELY LOSE money when tax thrift shoppers flip what would have been a tax-free weekend of shopping in Massachusetts into a tax-free weekend of shopping in *gasp* Connecticut for their tax holiday (please do not do this) or a New Hampshire getaway (Anytime) whilst whistling the tune of another mauling of Massachusetts main street retailers desperately fighting to compete with online retailers. 

Because the issue often comes down to the wire, retailers counting on the summertime cash flow were already advertising for it. 

According to Josh Miller of the Boston Globe when the matter was being discussed in July;

"House Speaker Robert A. DeLeo said that pausing the sales tax holiday “may be, possibly be, something we may have to take a look at.”  

Additionally, The Senate, said its president, Stanley C. Rosenberg, “has increasingly been skeptical about whether this is a good use of $20 [million], now $25 million a year.” 

Governor Charlie Baker said skipping the tax holiday “ought to be part of the conversation” as the state looks to close the projected budget hole.

It is a big deal to abandon this holiday because even if your representatives that did it are correct in their supposition that the same purchases will be made during the winter holiday season, what we know for sure is that many retailers really struggle with cash flow in their business. 

For retailers to lose this tax-holiday induced cash injection means many of them will have to incure additional time and cost to closely watch cash flow; causing them to hold thier dollars tightly to make sure they can make it to winter holiday season.  

How does this affect you? Maybe now they do not hire your child for her first job stocking shelves and/or maybe now they will not have the ipad in stock when you need to get a last minute gift for your friends last minute party.  

Maybe now you wont have the store to walk to all because the added stress causes the weary business owner to decide that it is not worth the added stress to try and compete anymore. 







Five Time Saving Tips for Using the Search Bar in QuickBooks Online

Here at Prepared Accounting we know your time is valuable, so we've put together a list of five tips for saving you time in QuickBooks Online so you can get in, get out, and get back to your life. 

These tips are all centered around the search bar located in the upper right hand corner of your screen. 


Tip #1: Searching for a Specific Dollar Amount. 

Instead of wasting time looking through a whole year's worth of entries, just navigate to the search bar and type in the amount that you're looking for. Make sure to include the dollar sign ($) and a decimal point (.) and then hit enter. (Ex. $5.00). Your search will return all entries with that dollar amount. 

Tip #2: Search for a Customer

Navigate to your search bar and just start typing the name of the customer you're looking to obtain information for and QuickBooks will begin to return accounts containing that name. Just select the appropriate account and you'll get all of the details pertaining to that customer. 

Tip #3: Quickly Run a Profit/Loss, Balance Sheet or Other Report

Bypass multiple clicks and menus on the left navigation bar and just type the letter "r" into the search bar. QuickBooks will automatically generate a list of reports for you to select. Alternately just type "profit" or "balance" to find the reports that you're looking for.

Tip #4: Run Account Reports

Need to see transactions within a specific account? Type the name of the account or the letter "a" to browse your chart of accounts. 

Tip #5: Quickly Begin an Advanced Search

To begin an advanced search within QuickBooks, just type "advanced" into the search bar and hit enter. From here you'll be able to select specific criteria for performing your search. 

If you found value in this post, please share and help others save time too! 

Low income year? Convert your Traditional IRA to a Roth IRA; Understand Tax Bracket Efficiency


Some years you just have lower (OK a lot lower, OK maybe zero) income.  Carpe Annum to get a big future tax benefit with your Traditional IRA.

If you left your job to start a small business or took a year off to travel the world, you are in a unique position to make some tax moves.  This opportunistic position exists because you can fill up your low tax bracket 'buckets' with your Traditional IRA monies that have already been deducted.  With this conversion style tax move you can grab the benefits of the Roth IRA as well.  Now your money grows tax free forever.

TAX TIP: Tax brackets are like buckets, once you fill up the 10% bucket with income that year you pay 15% only on the rest of income that pours in until you fill up that bucket and start paying 25%... and so on.  The standard deductions and personal exemptions are basically your 0% tax bucket.  

Another way of looking at it is that, in the absence of income, you have a standard deduction and a personal exemption (these create a zero tax bucket of $10,300 in 2015) to use this year that might be wasted or underutilized.

Here is how it lets you keep more of Caesar's money:

If you already have a Traditional IRA, you already got a income tax reduction with the contributions you made in earlier years; so you got the benefit of a Traditional IRA as opposed to a Roth.  The trade off is that the earnings on your (well invested) traditional contributions are taxed when you retire.   The benefit of a Roth IRA is that the earnings are not taxed when you retire, however you pay tax (at whatever income bracket you are in) when you put the money in.   

It follows that if you convert a $10,000 Traditional IRA into a Roth IRA (totally legitimate) in a year that you have no income than you get the benefit of both types of IRAs. Now your $10,000 grows tax free and you never paid tax on it.   Voila!  

This still works if you went from the 10% tax bracket in 2014 to the 15% tax bracket except now you pay less tax instead of no tax. 

Got it?  Now go for it!