Navigating Estimated Taxes for Your Painting Business

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution. While we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decisions.

Hey, this is Daniel, the founder of Bookkeeping for Painters.

And this is Richard, the tax director for Bookkeeping for Painters. Hey, Daniel, how's it going?

How's it going? Going well.

Yeah, yeah. Um, summer is upon us. The air conditioning is now on. Uh, Northern Illinois is feeling a lot like Central America right now, um, but without, uh, the beauty of the ocean.

Yeah, yeah. Well, now here where I am in, uh, Nicaragua, it's like changing over to rainy season, so it's not as beautiful as it It's like beautiful 6 months of the year and then kind of overcast the other 6 months. So I'm starting— we're starting to get a little bit more rain, but nothing too bad. It's still go to the beach every day, so I can't really complain too much.

Right, right. Uh, so, you know, summer, summer season is not just, uh, you know, sun and beaches and rain. It's also, uh, tax season in a way. It's— so tax season is behind us, right? We have hopefully filed our 1040 tax returns, our business tax returns, and now we can kind of turn our attention to estimated tax payments. So we're going to talk today about what estimated tax payments are, who needs to make them, how you can make them, what happens if you don't make them, and just kind of give some general guidance in how you can make sure that you are keeping up on these, on these payments that are due each quarter. So if you're a business owner, you're probably familiar with estimated tax payments. If you're not a business owner, if you've always been an employee, this might be something new to you because basically the IRS, they get their money in two different ways. If you're an employee, they're going to withhold it from your paychecks. If you're a business owner, they're going to want you to make quarterly estimated tax payments. The IRS is what they describe as a pay-as-you-go system. So as you make income throughout the year, they expect you to pay in taxes. At the end of the year, it is reconciled when you file your tax returns. So if you pay in a little bit too much, you get that refund. If you don't pay in enough, you will have a balance due. But if you don't make the quarterly payments and you owe, you might owe some interest on those amounts. They have a name for that. They call it underpayment penalty. So we want to make sure that we are having enough taxes remitted to the IRS and also the state. If you live in a state that taxes your income. We want to make sure that those payments are going in on a regular basis so that our balance isn't building up. And that's the main reason why you want to make estimated tax payments, to avoid that underpayment penalty. But it can also help you with managing your cash flow. Daniel, have you ever had a client who didn't realize they needed to make estimated tax payments And then when it came time to file their tax return, they had kind of a nasty spring surprise.

Yes, unfortunately, do get that a lot. We, you know, and we often send out reminders when, you know, estimated tax time comes around. So a lot of folks, they'll see that reminder like, okay, I see, I got to pay estimated tax payments, I guess, but I have no idea how much to pay. And so that's a big question that we get too, is, you know, what do I pay them? I have no idea.

Right. Absolutely.

Yeah.

So two things like when do I pay them and what do I pay them? So let's dive into when do I pay them first. It is quarterly, but not really. So everything, yeah, right. Like everything the government does, it's, it's a little wonky. You do make payments on a quarterly basis. Sometimes they're called your quarterlies, but they're not due every 3 months like normal quarters would be. So your first estimated tax payment is going to be due April 15th. Your second payment is going to be due June 15th. Your third payment, September 15th, and then your fourth quarter payment will be due January 15th. So you probably realize that there are, uh, 4 months between January and April, only 2 months between April and June, uh, and so they don't exactly fall on the quarters, but, uh, averaged out it would be, uh, once a quarter.

Yeah. And then to add to the confusion, that only applies to sole proprietors and S corps. But if you're— you have a C corp, you have different dates, which is slightly confusing.

Yes. Yes. If you're a C corp is paying taxes, your due dates are a little bit different for that corporation. For sure. Those, those dates are actually more, I think, on the quarterly basis. It's like January.

Yeah, they're like pretty much the same except that January 15th payment doesn't exist. It's on December 15th. So January 15th.

Gotcha.

Just to keep it confusing.

Right, right. But for the most of us, we are either, you know, a sole proprietorship or we're a disregarded entity like a partnership or an S corp. So we're going to, we're going to stick to the The January, April, September— wait, I forgot one. June, January. Oh my gosh. April.

April. They got to keep it confusing.

They don't want—

you know, they want to be able to charge you that interest is really the interest and penalties. So you have no idea when they're due, right?

The IRS, they're so much fun that way. April, June, September, January. Okay. Those are the due dates. And if the 15th happens to fall on a weekend or a federal holiday, it will get pushed off to the next business day. So like this year, April 15th was actually April 18th. January 15th will be January 16th. But if you make it by the 15th, you'll be safe. So that's when. Next question is how much? This is a loaded question and this is one of the big things that we do with our tax planning clients is we try to do very accurate projections to help them know exactly how much they need to pay in estimated taxes. But if you don't have, you know, fancy projections, there are a few things you can do. One is you can base your estimated taxes on last year's amounts. So if you owed, say, $10,000 in taxes last year, you can divide that by 4 and make 4 payments of $2,500— of $2,500— $2,500 each. That's going to cover 100% of last year's taxes, and that will work very well for those of us who have adjusted gross incomes or taxable incomes of $150,000 or less adjusted gross income. If our AGI is higher than $150,000, then we're going to want to do 110% of last year's tax liability. So $10,000 turns into $11,000. We split that up into 4 even payments. Now, why is that important? Well, if we pay at least as much as we owed last year, we will qualify for what the IRS calls the safe harbor amount. So think of it as kind of like the minimum you need to pay in order to avoid that dreaded underpayment penalty or the interest that they charge. Because, you know, as a business owner, you might not know how much profit you're going to have until closer to the end of the year. And you might, you might come in waves too. So if we pay at least as much as we owed in the previous year, then we won't have to pay any kind of underpayment penalty, even if it turns out that we had a big year and we're going to owe a lot more taxes.

So that's, that's what So let me just make sure I understand here. So if I'm a painting business owner and I have no idea how much I need to pay in estimated taxes, I need to go get my previous year tax return on my Form 1040 on the top of page 2, somewhere near the top.

Gonna be line 24.

Line 24 for the tax form for 2022. Right?

Yes.

And it's going to say, uh, total taxable or total tax liability, right? That line. Total tax liability. I look at that line and I take that number and I divide it by 4, and then that's the amount I need to pay each of the due dates in April, June, September, January, right?

That's the amount of, of estimated tax you need to pay in total. Now, there are— there is another way of making payments besides estimated tax payments, and that's the withholding from your W-2. So if you have another job or you are a shareholder in an S corp and you're getting a paycheck that has withholding, that withholding goes towards that amount. If you have a spouse who has a W-2 job and they're getting withholding, that withholding goes towards the amount. So again, because we're making things complicated, $10,000 in tax liability, line 24 of last year's 1040 tax return. Now you've got, say, $6,000 being withheld from your paychecks. That leaves you with $4,000. Divide that by 4 and you know how much you need to pay for each estimated tax payment.

Yeah. So, so you look at your, your pay stub or whatever W-2 wages that you're getting, your pay stub should have your total federal withholdings for the year. And if you're in the middle of the year like we are now, you kind of multiply that by 2 to kind of project out, okay, how much am I going to I pay through my W-2 withholdings for the entire year, and that will give me how much I'm going to be paying the IRS through my W-2 federal withholdings. And then I take that number and I subtract it from the total tax liability on line 24 of my previous year tax return. Is that right?

Yes, sounds like a fun weekend, doesn't it? Um, Yes. So, so yes, technically yes. My advice, because that is a lot, you know, we are certainly happy to do these projections for you. You know, we work with a lot of different painting business owners and help them understand exactly what we project their tax liability to be. We know what their withholding is going to be, and we can help them get, you know, very fine-tuned numbers. Or go ahead and err on the side of caution. If you think you need to make a $1,000 payment and you have the cash flow and you want to pay a $1,200 payment instead, that's perfectly fine. If you end up overpaying in your estimated taxes, you will get a refund at the end of the year.

Is it going to be included, the interest that the IRS are they going to pay us interest for that money that they get to hold on to longer since we have to pay the penalty interest?

So does this work both ways?

Yeah.

Where if we owe them, then we pay interest, but if they owe us, they don't have to pay interest? Yeah. Yeah, that's how it works, right? So welcome to the government. You make a really good point, Daniel. And a lot of times people will say, I love getting a huge refund in the spring. And that works for a lot of people. You know, the, the, the mental stress of having to manage all these numbers can be taxing and time-consuming. So maybe it's just easier for you to overpay a little bit and get that refund. But there is a cost involved, and that is, you know, the, the value of your money is tied up with Uncle Sam when it could be deployed in your business, could be invested in your retirement accounts, could be taking you on vacation. You know, what works for you is what you're comfortable with. But yes, as you know, a general rule of thumb, if you can file your tax return and have, you know, a $0 balance, or maybe even like, you know, a couple hundred dollar balance, uh, you're going to be paying— you're going to be using your money in the most, you know, effective way possible.

So what if instead of me overpaying, I want to live on the wild side and underpay, you know, because I, I, you know, I just want to see what happens? What, what kind of risk am I taking on if I'm just going to either not pay or just significantly underpay each estimated tax payment?

Sure. So, so the risk is the underpayment penalty, which is interest. This is assessed each quarter. So if you miss the first quarter payment, which a lot of people do because it comes due the same time as your previous year's taxes are due, and so it's really hard to make both those payments. You know, you will owe interest on the amount you should have paid in between January and March 31st. If you miss the second quarter, then you'll pay interest on the amount that you should have paid in between April 1st and June 31st. So the later payments, the third quarter and especially the fourth quarter payments, those are the ones you really want to focus on. Because those are the ones that kind of compound. But will people show up at your door demanding payments? No, no, of course not. Will you have to make the balance due payment when you file your return? Yes. And that can be a very difficult check to write, especially if you have to add several hundred dollars of underpayment penalty to it. So You know, we are required, like we said, you know, the IRS is a pay-as-you-go system. They do expect us to pay our taxes as we earn the income. But there might be situations where you decide that your money might be better spent other places. You might have more pressing obligations. And that is certainly, you know, a valid choice that you might make. But, but be prepared to, to pay a little bit of interest. On those missed payments. We talked about, you know, the due dates. We talked about what happens when you don't pay the payments. Let's talk about how to make the estimated payments, 'cause that's the next natural step, right? So there's the old-fashioned way that involves a little coupon and a check and an envelope and a stamp, and you can mail that into the IRS. If you need coupons, talk to your tax preparer. Hopefully they have provided you with some when they prepared your tax return with some estimated amounts on there too, based on last year's tax liability. If you don't have them, you can download them from IRS.gov and you can fill in your own amounts. Make sure your Social Security number is on the voucher and also write it on the check. I would say on the memo line of the check, write your Social Security number and write the tax year. So this would be 2023-1040-ES. And that way there will be no ambiguity when your check gets to the IRS about how and where it should be applied. So that's if you want to mail it in and the address is going to depend on what part of the country you live in. We can't just all send them to the same PO box, unfortunately. Check the, uh, the paper with the vouchers will have the right address on it based on where you live. Um, so okay, if you don't want to bother with that, uh, we do live in the 21st century, so we can pay online. There are two ways of making payments online. There is what's called IRS Direct Pay, and then there's also the EFTPS, which stands for the Electronic Federal Tax Payment System. Most people find IRS Direct Pay easier to use. IRS Direct Pay can be accessed at irs.gov/payments, or if you go to the website, find where it says Make a Payment, click on that. Direct Pay allows you to make a one-time payment. Uh, you'll have to enter in your personal information. They will verify your identity and then they will allow you to put in your bank information and make that payment. Before you make the payment, they're going to ask you what is the reason for your payment. And if you're making an estimated payment, you're going to want to say estimated payment and the tax year for which it's for. So if you're listening to this podcast in 2023, it would be tax year 2023.

And the IRS, they even have IRS2Go app you can download for onto your, your, your cell phone as well. You have a Google Play Store. If you go to IRS2Go or the App Store, they have their own app and you could, you could do, make a payment using IRS Direct Pay, but they have their own app, so that's kind of cool.

Yeah, nice. IRS to go. It sounds like the worst cafe ever. No. Yeah, yeah, definitely use the app if you're more comfortable with that. Direct Pay is a great system. The downside of Direct Pay is that it is a one-time deal. And what I mean by that is like every payment is a brand new process from the start. So every time you go to make a payment, you have to enter your information, you have to verify your identity, you have to put in your bank account and whatnot. If you're going to be making regular payments to the IRS or if you're a corporation, you're actually required to do this. By corporation, I mean C corporation. You're going to want to use the EFTPS system. The Electronic Federal Tax Payment System. They have a lovely website right out of 1998, and you will go there and you have to enroll. So this is, this is the time-consuming part. You have to enroll and they will mail you a PIN number, which you will then use to set up your account. But once your account's set up, it's just a matter of logging in. Your information is saved. and you can quickly make all sorts of tax payments. So estimated payments, balance due payments, you know, IRS appreciation payments. No, those don't exist because no one appreciates the IRS. So, but yeah, the EFTPS is very useful if you're going to be making a lot of payments. So you might want to go ahead and, and get that set up. So you don't have to enter everything new every time.

Awesome. So I think, I think we covered the gambit with, with estimated taxes.

Yeah, I think so. If you have any questions about estimated taxes, you can let us know at the Grow Your Painting Business Facebook group. You're all welcome there. We'd love to hear your questions. Let us know how you feel about estimated payments. Do you try to make them every court? Well, how do you feel about— I know how you feel about them. Daniel's looking at me like, like, how do you feel about them? Right? So, yeah, I'm a little off the rails today, so I apologize. But let's— you can let us know how you handle them. Do you make online payments? Do you mail in a check? Do you have difficulty knowing how much you should pay and what are your, what are your solutions for that? Quick, quick tip that we didn't cover. If you're just starting out, you might not know what your last year's taxes are. You might not know how much money you're going to make. A little shortcut is figure about 25% of your profit. If you're just starting out, this works. This number works pretty good. For profits between, you know, like, like $0 and $80,000 if you're married, I'd say $40,000 if you're single. But 25% is going to cover your self-employment tax. It's also going to cover your regular income tax up to that, like $80,000 if you're married level. So that, that might be a nice little shortcut if you're just starting out.

Nice. All right. So with that, I hope you all enjoyed the episode. Let us know your feedback and then grow your Painting Business Facebook group. And with that, we'll talk to you next week.

Yeah, thanks for listening and have a great rest of your day.