When you work for yourself, nobody takes taxes out of your pay. The IRS expects you to pay as you go instead, in four payments through the year: April 15, June 15, September 15 and January 15. Colorado uses the same four dates.
Your tax preparer works out how much to send. I’m a bookkeeper, so that part isn’t mine. What I can tell you is what that number gets built from, and that’s your books. If they’re current, the estimate starts from what your business really made. Three months behind, and part of it is a guess.
Here are the four things I make sure the books show.
1. What the business has made so far this year.
Estimated tax is figured from the income you expect for the year, and what the business has made so far is a big part of that. So your profit and loss needs to be current, with every account reconciled through the most recent month. Small business income often doesn’t come in evenly. One strong month in the fall can move the estimate, and your preparer only sees it if it’s in the books. (Here’s how to read that report.)
2. Every payment you’ve made, in one place.
At tax time, your preparer will ask how much you’ve already paid to the IRS and to Colorado. The IRS’s own estimated tax form has a table for exactly this, a row for each payment with the date paid and the confirmation number next to the amount. In the books, I give these their own accounts, one for federal and one for the state, so the year’s total comes off one report. Your IRS online account and Colorado’s Revenue Online both keep a payment history too. It’s worth checking that they match.
3. Payments kept out of your business expenses.
In a single-owner LLC, the business’s profit goes on your personal tax return, so estimated tax is a tax on you. The IRS’s small business tax guide puts it in six words: “Do not deduct federal income tax.” Colorado’s income tax isn’t a business expense either. So when a payment comes out of the business account, I record it on the owner’s side of the books, right next to your owner draws. If it lands in expenses, the profit number comes out too low, and so does any estimate figured from it. (More on owner draws here.)
4. The ones you paid from your personal account.
If you paid one from your personal checking, the business bank feed won’t see it at all. Send a copy of the confirmation to whoever keeps your books. It still goes on the year’s list, and your preparer needs every payment to get the total right.
If your books are a few months behind right now, January 15 is a good reason to catch them up. A catch-up is quoted by how many months it covers, so every month it waits adds to it.
If you’re not sure where your books stand, start with the free Books Health Quiz.
Take the free Books Health QuizKeep reading: 5 Things to Get Ready Before Your Tax Preparer Asks for Your Books