Home Business Tax Tip: Paying Estimated Taxes

When you have a home business, you are responsible for keeping track of your taxes. One way to do this more easily is to pay estimated taxes quarterly. Estimated taxes are figured out based on your current year’s tax requirement. If you owe $5,000 in taxes this year, your estimated taxes for the coming tax year will be 90% of the total ($4,500). Divide the amount by four, and pay quarterly.

I like to divide the amount by 12, rather than 4, and make a monthly payment into a high yield savings account. I do this for two reasons:

1. I like to be able to earn interest on the money while I can. For the better part of three months, I am earning interest on the money set aside for taxes — until it is time to write that check.

2. You still pay quarterly in order to avoid paying penalties to the IRS. When you underpay by more than $1,000, the IRS may decide to tack on additional penalties. If you don’t pay quarterly, the IRS may choose to charge you interest for late payments.

You can pay your estimated taxes by using Form 1040-ES.