Episode 30: Quarterly Taxes Explained for Creatives

  📍 Welcome to CreativeMind Smart Money, the podcast where creativity and business smarts collide. I’m your host, Samantha Eck, bookkeeper, business coach, and your go to guide for building the creative business of your dreams. Whether it’s mastering your money, streamlining your systems, or growing your business, I’m here to share insights that empower you to thrive.

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  Hello and welcome back to another episode of Creative Minds Smart Money. And today I am so, so, so excited for this topic. I know I’ve been saying that a lot lately, but January is such a good month to go over a lot of these topics and I’m so excited to just dive into them and chat about them. So today’s topic is quarterly taxes.

This is a question I get all the time and I’m not even kidding all the time. Nobody understands quarterly taxes. They don’t make any sense. They think that by paying quarterly taxes, they’re paying like triple the amount of their taxes. So the whole point of this is talking about what quarterly taxes are, how to calculate them and how to stay ahead of them.

So it’s a little bit stress free. We really want to talk about like and understand just what they are because a lot of people just don’t know. And like I said before, they think that there’s some sort of addition. to the taxes that they’re already paying. So let’s start off by answering that question.

What are quarterly taxes? Quarterly taxes are payments made to the IRS throughout the year to cover both your income tax and self employment tax. It is not in addition to any payment you would make in April. It is essentially splitting up your tax payment over the course of the year, so it’s less stressful when it comes to the end of the year.

It is definitely necessary if you’re expected to owe at least 1, 000 by the end of the year, which usually if you are a business owner and you’re making money, you’re going to owe more than 1, 000 by the end of the year because you want to calculate about 30%. So if you’re someone who charges 1, 000 per client, you have four clients, you’re already expected to owe 1, 200 a year, you’re expected to pay quarterly estimated taxes.

You are both the employer and the employee so your job To make payments becomes a little bit more complex because you’re paying both halves You’re not just paying one half because when you are for example an s corp or you work for a corporate job or something like that You are already paying taxes So there is no real reason to pay quarterly taxes But like we talked about in the last episode if you elect to be a sole proprietor or a single member llc You are expected to make those quarterly tax payments And you can actually get penalized for not making them So They do matter because you want to avoid penalties and fees.

Like I said, if you’re expected to owe at least a thousand dollars by the end of the year, you want to split up your tax payments on a quarterly basis. There’s only like, I think three ways if I’m not wrong, because I did study to be an EA. I just chose not to be one because I don’t like taxes at all. But there’s three ways you can avoid fees.

First of all, it’s if you pay your As like your tax Amount that you owed the previous year 100 the second way is if you Pay up to at least where you only owe a thousand dollars When you get your taxes and then the third way is if you owed no taxes last year So let’s say, you got money back last year, then you wouldn’t be penalized and there wouldn’t be any fees so It matters because this can give you peace of mind and also separate those into manageable chunks.

So if you’re already setting aside money during the year, which is something I advocate for my clients I always tell my clients you are setting aside money throughout the year It just helps to break that tax bill into much smaller chunks so that you’re not having this overwhelming tax bill at the end of the year.

And then it also helps you to stay in control of your cash flow so that, come April, you’re not expecting this 20, 000 tax bill and you’re like, Oh my gosh, I don’t know how I’m going to pay that. It just makes it a little bit easier for you. Now we have to think about how we calculate quarterly taxes, so calculating them if you’re working with me is pretty easy I actually present them to you on a monthly basis But if you’re working by yourself, you want to think about how much you’re gonna earn for the year So if you’re gonna earn, 100, 000 in a year you want to Subtract from income, your expenses, your estimated expenses.

So if you’re going to say, you’re spending 60, 000 a year, that means you’re only going to make 40, 000. So now you want to take that and times it by the 15. 3%, which is the self employment tax and the federal income tax. And if you’re in a state, you also need to like worry about state taxes. If you’re in a state that charges state taxes, so then you want to divide that by four.

As an example, just as a raw example, if you are making 60, 000, you’re spending 20, 000 on expenses, and your taxable income is then 40, 000. Your tax rate is 25%, so that’s 10, 000 you are going to owe in taxes annually. You now need to split that into four payments, which is about 2, 500 a quarter. I will always say this, I will always say this, it is better to pay more That it is to pay less.

I know it sucks to give a lot of money to the IRS and then get some back at the end of the year. But. I am of the strong mindset that I would rather get money back from the IRS than pay them a bunch come April. So the best way is to always pay more. I actually estimate even higher with my clients. We go to 30%.

So what we’ll do is every month we’ll take their income, subtract their expenses and their cost of goods and whatever that net income is, we try and set aside that 30%. And I will tell them exactly what that 30 percent is so that they can attempt to set it aside. Some of my clients don’t set it aside and that’s totally fine.

It happens. You So how do we pay quarterly taxes? So you have four deadlines throughout the year. The first deadline is April 15th. That is your first quarter. It’s from January to March, which sucks, I know, because you also have to pay like your annual taxes around that same time. So And the annual taxes that you’re paying is what’s left over from last year.

So you’re paying what’s left over from last year plus what you’re estimated to make this year. So it can often feel a little overwhelming, but like I said, hopefully you’re not paying anything from last year because you’ve already made those quarterly payments. Then you have June 15th, September 15th, and January 15th.

The nice thing that I like to do for my clients is send out a email on the first of every month that these payments are due and say, Hey, your quarterly taxes are due for this month to this month. Make sure you’re reviewing that sheet that I sent you so that you can make sure that you’re paying the correct amount.

You want to go and you want to pay online and that is IRS. They accept debit, credit, direct withdrawal. I think you can also send in a check, but I would never send in a check because those take forever. And then when you get that payment confirmation, you’re going to want to save that for your records.

It’s so important that you save that because at the end of the year when you get to your taxes, your tax preparer is going to need to see that you made those estimated tax payments, but then it’s also like a backup so that if the IRS is ever like, hey, we never got your payments, you can be like, actually, you did.

This says that you took it. I saw it come out of my bank. And then for the state taxes, you’re going to want to check your state taxes website for deadlines and payment instructions because it varies state to state. I’m in Texas, so we don’t owe any state taxes. So that’s not applicable to me, but sometimes your state can have different deadlines than what the federal deadlines are.

Now to stay ahead, of course, you want to use a dedicated business bank account. Like I said, start, save as you go. So every time you make income, set aside 25 30 percent for taxes automatically. So again, if you’re making that 1, 000, automatically put 300 into a savings account. Whether you set that up with a software like Relay, whatever it is, make sure you’re setting that aside.

Use bookkeeping software for real time tracking. This is why tracking expenses is so important because it can help you to determine how much you need to pay for estimated payments. And then adjust payments if income changes during the year. So if your income increases or decreases, you can always adjust those payments throughout the year.

So maybe your income drastically decreased, maybe you don’t have to make a payment. Maybe you’re spending more on expenses than you are on income. It’s best to obviously consult a bookkeeper in TaxPro because It’ll help you to avoid any costly mistakes that come with quarterly estimated taxes.

So if you overpay, you’re going to get a refund at your filing when you file your annual return. So when your tax preparer files it, you’ll get a refund because you’ll put in those estimated tax payments and it’ll say, Hey, you paid more than what you owe. We’re going to refund you. However, if you underpay, you’re obviously going to owe more a tax time plus you may get a penalty.

That is not always what happens. You don’t always get a penalty. The goal is to get as close as possible to avoid any surprises. So again, then 20 to 30%, usually we do that 30%. It’s just, is it better to be closer to paying it all than not at all? Once you pay those quarterly taxes, it’s going to give you confidence over your business because you’re already setting aside those taxes.

You’re not going to feel stressed out. I’ve seen too many people come online and say, Oh my gosh, I feel so stressed because I had to pay this huge tax bill. Don’t be stressed about it. Pay it throughout the year and you won’t have to worry about it. Even as an S Corp, I do always suggest looking at what your, paying in your payroll to make sure it’s actually that 25 to 30 percent of what you’re earning in your income.

Because if it’s not, you might want to make additional payments to make sure that your bills are covered. It just helps. That might be wrong, because I know that sometimes people are like, oh, you shouldn’t have to pay extra as an S Corp. And of course you don’t. As an S Corp, you can always wait until the end of the year because sometimes I think you will, owe less taxes as an S Corp than you will as an LLC anyways.

With this again, you’re going to have no more tax season surprises. So now you can just focus on your work throughout the year. April is just another time you’re just handing off your documents to your tax preparer. And it’s just going to help you feel empowered and like you’re running your business a little bit better.

📍 So to close, quarterly taxes can seem really daunting and overwhelming, but they’re manageable with the right system. And with the right system, You understand them, you know what’s going on, and it’s just really easy to get ahead. If you need help setting up a way to track those, please reach out to me. If you stay ahead of your taxes, you’re going to stay ahead of your business.

That’s always a bonus. If you enjoyed this episode or you found it helpful, please leave a review and share it with someone who you might think need it. If you need anything or you have any questions, always feel free to reach out to me, or if you have any suggestions for any future episodes, there is a form you can fill out in the description box below.

Otherwise, I appreciate you so much for being here, and keep being creative. Farewell, fellow travelers.