As creators, we're often so busy building our offerings and our team that we end up overlooking some key financial areas of our businesses.
If you're a photographer, designer, writer, maker, or any other type of creative, taxes are likely not your favorite topic. But if you can get in a healthy rhythm of planning and saving, the following amazing things will happen:
You won't have that dull feeling of dread following you around. You know the one, where you have a feeling you should be doing something but you're not exactly sure what or how?
Your tax bill won't sneak up on you and wipe out your cash balance
You can feel confident that you're building a strong financial foundation for your business - leading to better decisions and higher profits.
Ready to build this healthy financial habit with me?
Fantastic - let's get started.
First off, what are estimated quarterly taxes? These are prepayments made throughout the year to cover the income tax, self-employment tax, and potential other taxes you may owe. This system exists because in the U.S., we operate on a 'pay-as-you-go' tax system, which means you must pay income tax as you earn or receive income during the year.
The IRS recommends paying quarterly taxes if you expect to owe at least $1,000 in tax for the year.
One might ask how they could ever know how much tax they'll owe at the end of the year?
Well, I'm so glad you asked!
Start by projecting your business profits for the year. You can do this by estimating your total revenue (money in) and subtract out all deductible expenses. If you don't have a good bookkeeping system in place or an idea of your annual budget, don't get discouraged! Check out my Resources page for some helpful tools.
Calculate your estimated taxes. You can get as detailed with this as you want. A good rule of thumb is to save between 25-30% of your net income depending on your state's tax rate. Lots of creatives I talk to think they need to save 30% of every invoice their customers pay them, but that could result in you setting aside too much in taxes because you're not taking your expenses into account.
Here's a handy formula:
Gross revenue (all sales made to customers/clients)
- Expenses (contractor payments, subscriptions, permits, coaching but NOT payments to yourself)
= Net Income
= Annual estimated tax
= Quarterly estimated tax
Of course, this is a very simple example, but you can get more detailed as you start to get the hang of it!
Schedule Your Payments: The IRS divides the year into four payment periods, and each has a specific due date: April 15, June 15, September 15, and January 15 of the next year. Get these dates on the calendar and track toward them.
Make Your Payments: There are several ways to make these payments. The easiest and fastest method is to use the IRS's Direct Pay system online. You'll need your bank account information and your social security number to verify your income.
Pro Tip: If your business is a sole proprietorship, LLC, partnership, or S Corp, these are known as flow through entities, so your business taxes are actually lumped in with your personal taxes. So you'll be making these tax estimates as yourself not as your business.
This means that you'll select 1040-ES as the form you'll be applying the payment to on the IRS website. Then when you go to file your personal taxes in April, you'll apply those pre-paid estimated taxes to your personal tax bill. Make sense?
To make all of this a little bit easier for you, I've created a free, simple estimated tax calculator and payment tracker, which you can download here.
The process of integrating regular tax estimates into your business routine might seem daunting, but with a little bit of planning and some helpful tools, you can navigate it with confidence. Take the first steps, schedule reminders on your calendar, and move on so you can keep creating!