Avoid a Costly Surprise
Don’t let the Q1 estimated tax deadline for 2023 surprise you. The deadline for making your Q1 estimated tax payment is April 18, 2023. One of the reasons that payment of Q1 estimated taxes can become overlooked or forgotten is that April 18 is also the filing deadline for your personal tax returns.
If you are an owner-operator, independent contractor, fleet owner, or trucking entrepreneur, you’ll need to be aware of the estimated payment tax deadlines for 2023 – with the first of those coming up on April 18. We wanted to share some notes with you on estimated tax payments because this is a subject that always generates questions that are asked of our Trucker CFO Team. Most often, those questions are coming from those owner-operators and independent contractors who recently have made the transition from being a W-2 employee to becoming self-employed.
What happens if you don’t pay your quarterly tax payments?
Ignoring the payment of estimated taxes is not a good business strategy. If you fall into a category that requires you to pay estimated taxes, you need to keep up with those payments. There can be penalties for failing to pay estimated taxes, and taking the ostrich approach with estimated taxes won’t make your tax liability go away. In fact, falling behind on payments will lead to mounting costs.
Of course, there is nothing that business hates worse than a big surprise that’s costly. If you are in one of the groups requiring estimated tax payments, you are given a break with estimated taxes during the first year of your business. The IRS doesn’t require estimated taxes because your business does not have a baseline for your annual earnings. However, at Trucker CFO, we still recommend that you make plans to make your quarterly estimated payments in that first year and obviously in the subsequent years of your operation.
One of the reasons that we recommend that you get in the habit of paying estimated taxes in the first year of operation is to avoid writing a big check when you file your taxes. Your quarterly tax payments are addressing your self-employment responsibilities throughout the year – covering your FICA contributions to Social Security and Medicare that are common deductions for W2 employees.
Why are estimated tax payments important?
The quarterly tax payments are designed to break up your ongoing tax liability into four payments throughout the year rather than one lump payment. One of things that can happen, especially if you do not start quarterly payments in your first year of business, is that you could have to write a large check at the tax filing deadline, and you’ll also have to write a check for your Q1 estimated tax payment of the current year.
When you get beyond the first year of business, there are penalties for late payment of estimated taxes and underpayment of estimated taxes. If you ignore estimated taxes or you choose not to create a plan with a budget for paying estimated taxes, you will be at serious risk for creating unwelcome surprises and unnecessarily taking money out of your pocket to cover the expense of the penalties involved.
At Trucker CFO, we work with our clients to build a plan for estimated taxes and they know how much will need to be sent to the Treasury Department with each quarterly payment. Typically, Q1 estimated tax payments are based on your earnings from the previous tax year. However, at Trucker CFO, we work with our clients throughout the year to monitor earnings and make estimated tax payments based on the earnings of the business within that particular year.
By taking this approach on estimated taxes, our clients have paid the appropriate amount throughout the year and that typically lessens the amount that clients have to pay when they file their tax returns. Our goal with estimated taxes is to develop a payment plan that pays your tax liability for the year down to as close to zero as possible.
In collaborating with our clients to track their earnings throughout the year, we working with you to make sure you are not overpaying and essentially providing the government with an interest-free loan. And while tax refund checks are nice, when it comes to people paying estimated taxes, those tax refunds are basically the government returning money that you gave them during the year.
Through our many years of experience, we know that quarterly taxes can be thorn in your side and get overlooked. To help our clients meet their responsibilities with estimated taxes, Trucker CFO has set up an escrow account system that is quite similar to the escrow accounts used by motor carriers.
With the system that we have in place for addressing quarterly taxes, our clients’ quarterly taxes are made through our Trucker CFO platform. Our clients authorize the payment from their escrow account with us and we send the quarterly tax payment to the U.S. Treasury Department or the state tax agency on their behalf to cover those tax liabilities.
Do you pay estimated taxes from your personal or business bank account?
At this time of year, when tax liabilities are calculated during the tax filing process, our Trucker CFO will often be asked the following questions: How do I pay this? Or, where do I pay it from? Where does the cash need to come from? Can it come from my business account or does it need to come from the personal account?
When it comes to the type of bank account used to pay your tax bill, the answer is that the payment can come from either your business or personal bank account. Now, if you don’t have the money in the business accounts because you transfer all of your business cash into a personal account, by all means you can pay your taxes from your personal account.
Our recommendation to people, as it pertains to the business portion of their tax liability, is that the business should pay for those taxes. Here’s how we view it…As you are going throughout the year, you are making money and, as you are generating a profit, you have an opportunity to create a plan to set some money aside that will cover your tax liability responsibilities. Many of our Trucker CFO clients use our Trucker CFO Tax Escrow Account. They are putting money aside from the business and the business operations, and, as those tax liabilities come due, they are able to cover those costs out of that escrow account, or they pay it out of a business checking account.
By taking this approach, you’re not left trying to come up with the money out of your personal account, which is typically the account you are already using to make your car payments, house payments or cover your rent. You really want to keep your business-related expenses and your personal banking activities separate. It allows for better money management and it can help you avoid budgetary surprises.