A quick review of the basics, that aren’t all that basic.
While the future of the IRS is anything but certain, your best choice is still to file something by Tax Day on April 15th*. Although tax time can be painful and you may not be ready to pay what you owe on tax day, that’s okay. Preparing to file – even if you get an extension – is a great chance to see your business’s bigger picture. It can also help you create a plan to stay on top of your tax payments for the tax year that just ended and the one we’re in. Stay with me as I review some tax how-to’s, some deadlines and the Why of it all. But first..
Housekeeping
If you’re a Sole Prop, an LLC or a C-Corp, your taxes – or an extension – are due *either* April 15th or May 1st. This depends on where you live and where your business is registered, keep reading below for more details. If you opt for an extension, your taxes will be due Oct 15.
If you’re an S-Corp, a Multi-member LLC or a Partnership, you’re either almost on the other side of business tax season – HOORAY! – or you filed an extension, in which case your taxes are due Sept 15.
EVERYONE’s 1040 (personal return) is due April 15th *OR* May 1st. Again, keep reading for details on which is correct for you. S-Corps, Multi-member LLCs and Partnerships will use the business return filed in March to file their personal return due in April.
If you are not prepared to file…
…do not panic! Just file an extension as soon as possible, using tax software or a tax pro. I have been using TaxSlayer during my volunteer work with VITA Latino, preparing simple tax returns for vulnerable members of Charlotte’s Latino community. From my personal experience, TaxSlayer is very user-friendly software, so it’s worth checking to see if you qualify to use it. If you don’t qualify for TaxSlayer, there are other free options to file depending on your situation – and filing an extension with any IRS Free File partner is free!
Once that extension is filed, then turn and face the problem head on. Your friendly neighborhood bookkeeper is standing by to support you! Ignoring the problem will only add more penalties, fees and interest. If you do end up owing a substantial amount of tax, it’s better to know what you’re dealing with so you can attack the problem. The IRS has many simple options available to establish a payment plan.
It’s important to remember that while anyone can file an extension, any taxes owed for the 2024 tax year are still due on April 15th*, so if you’re late, you will be penalized for every month that goes by. If you’re not fully prepared to file and there’s a chance you might owe, you can minimize penalties and interest you owe by filing your return as soon as possible (instead of waiting until October when your extension is technically due).
*unless the following applies to you…
Hurricane Helene Tax Relief
If you live or have a business in AL, FL, GA, NC, or SC: I almost don’t want to tell you this and hit the “snooz” button on your tax energy, but…
Back in October 2024, the IRS offered more time to file and pay for individuals and businesses in these entire states thanks to Hurricane Helene (as well as specific counties in TN and VA). For most states, these extensions mean postponement of many deadlines to May 1, 2025, and abatement (a.k.a. reduction) of penalties on taxes due during that period.
If it’s possible for you to file by the regular deadlines, I still encourage you to do so. But you should also read the announcement and talk with your tax professional to see how it affects your individual and business situations.
The big reason I knew I had to tell you about this is because: if you receive a late filing or late payment penalty notice from the IRS that has an original filing, payment or deposit due date that falls within the postponement period, you should call the telephone number on the notice to have the IRS abate (i.e., REVERSE) the penalty.
“The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area should call the IRS disaster hotline at 866-562-5227 to request this tax relief.”
Also Due on TAX DAY:
Q1 2025 Estimated Quarterly Tax Payment is also due April 15th. This applies to Sole Props, LLCs, Multi-member LLCs, Partnerships and even some S-Corp owners, so always consult with your tax pro. If you’re unsure if this applies to you, or if Tax Year 2024 didn’t go as smoothly as you would like, keep reading.
Estimated Quarterly Tax Payments
This is a nebulous topic for many business owners, so let’s pull back the veil and find clarity.
Federal Government tax payments are paid to the IRS include:
- Self Employment Tax: the combination of Social Security and Medicare that totals 15.3% of your income.
- Federal Income Tax, which can vary based on the type of income you made, how much you made, and what income was earned/what taxes were paid by any other earners in your household.
State tax payments include:
- Income tax Rates obviously vary by state. These taxes are paid directly to your state’s Department of Revenue, as a separate payment from your Federal Estimated tax payments.
They are estimates because the year isn’t over yet. So we estimate how much tax you’re going to owe, then pay it quarterly. This softens the blow for you by breaking the total tax due into 4 more manageable payments, AND the government is happy because gets some of its money up front.
W-2 employees pay a small portion of each of these taxes each pay period. The payroll company withholds money from each pay check and pays that money to these government agencies on your behalf. The tax benefit of being a W2 employee is that your company pays half of your Social Security and Medicare for you. But when you’re the business owner cutting yourself a check (and sometimes even when you’re an S-Corp owner on payroll) – you’re responsible for all of it.
When?
Q1: April 15th
Paying taxes on income earned 1/1-3/31
Q2: JUNE 16th (THIS IS A TRAP – how is this two month window supposed to represent a quarter of a 12 month year?!)
Paying taxes on income earned 4/1-5/31
Q3: September 15th
Paying taxes on income earned 6/1-8/31
Q4: January 15, 2026 (a 4 month quarter – also total nonsense)
Paying taxes on income earned 9/1-12/31
I’m sure there’s a -sound- explanation for the second quarter being only 2 months (“government budget deadline” – insert eyeroll), but it genuinely feels like entrapment to me. When I finally started remembering to make my quarterly payments, this short quarter tripped me up 2 years in a row and I doubt I’m the only slow learner among us. The good news is I’m always going to remind you when Quarterly Tax is due via this newsletter so you never fall in that trap!
How much?
Your tax pro can give you specific numbers, but the Safe Harbor Rule is to take 100% of last year’s Federal tax liability from your return and divide it by 4. Pay that amount each quarter by the due dates above. Even if you earn more, this Safe Harbor Rule will protect you from fines and penalties.
**Caveat: if you earn more than $150k, you’re required to pay 110% of last year’s taxes.** Again, if you end up overpaying, you’ll receive a refund when you file your annual return.
THEN, check with your state’s Department of Revenue to determine whether or not you owe them as well. If you live in NC with me, you can estimate here.
Where?
Online is easiest, I strongly recommend it.
Pay Federal Estimated Tax Here
Bookkeeping for Estimated Tax
One common bookkeeping mistake we see clients making is categorizing these Estimated Tax Payments as a “Taxes Paid” expense. It’s a reasonable choice given the language, but unfortunately, those tax payments must be categorized as “Owner’s Draw Equity.” Here, they will show up on your Balance Sheet, not your P+L. This is because they are personal income tax payments and not a business deduction.
Booooo, I know!
I do suggest creating a subcategory of “Owner’s Draw” called “Estimated Tax Payments”. This will remind you to inform your tax pro that you did actually make those payments – and DO tell them, preferably with PDF copies of your payment confirmations as evidence! Some entity types only require the Profit + Loss to file taxes, so the tax pro may never even see your Balance Sheet. This means it’s on you to make sure the tax pro factors your Estimated Tax Payments into their calculations.
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