This is one thing that many if not most business owners forget to do or don’t even know they needed to do until it was too late. It’s also a very easy way to quickly get your business in financial trouble.
If you are on payroll, you pay the government your payroll taxes out of each paycheck. But if you’re the owner, the profit of the business is taxable but of course the IRS doesn’t want to wait until you do your taxes for the whole year to get their money, they don’t want to wait more than three months. So every quarter, you need to pay them (and probably your state too) an estimated tax payment. Fortunately, it’s pretty quick and easy, just no fun.
First, it’s important to point out that the business can be profitable and still run tight on money. This is most commonly caused by large purchases that cannot be expensed but have to be entered as fixed assets that are depreciated more slowly over time. For example, if you were to pay $10,000 cash for a used vehicle, you don’t get to expense that, it’s a fixed asset. So your checking account will go down by $10,000 but you still owe taxes on most of that. Many small business owners get to the end of the year and show more profit than they felt or is sitting in their checking account.
Any time you make major purchases, set aside the taxes for your next quarterly estimated tax payment. In addition, any time you make an owner’s draw (take money out of the business and put it into your personal checking account) set aside at least 25% for your next quarterly estimated tax payment. This way, it’s kept completely separate and ready to go when it comes time to make the payments. This is the best way to make sure you never get behind on your taxes. Many small business owner fail to do this and then at the end of the year, they owe all of the taxes for all the profit plus penalties and interest since they didn’t make the quarterly estimated tax payments. Even worse, some don’t have the money at all, it was all spent. If you made $100,000 in profit, took that home, and spent it, you still owe roughly $25,000 in taxes. It’s probably not in the business account and it’s probably not in your personal accounts. This is one way new business owners get trapped in a hole that they can’t get out of. They usually only make that mistake once.
So set the money aside and make sure to pay the estimated taxes every quarter. They’re due roughly two weeks after the end of each quarter. So keep your books up to date so you can quickly make the payment and get back to focusing on your business.