The Benefits of Paying Estimated Quarterly Taxes and How to Calculate Them

While there are no criminal penalties for not paying your real estate business’ taxes every quarter, there are distinct advantages for doing so. You can save considerable money—and avoid unnecessary stress—by making an estimated payment every quarter instead of trying to pay them all at once after the year ends.

Prevent Tax Penalties

When you pay each quarter, you avoid the penalties levied against those who wait until after the calendar year finishes. The penalty stems from the IRS’s requirement that anyone who gets paid on a 1099 basis must pay their taxes every quarter.

For regular employees that get paid on a W-4 basis, the taxes they owe are automatically withheld from their paychecks. If the IRS withholds too much, you’ll get a refund at the end of the year when you file your taxes. If not enough is taken out, you will have to pay taxes after filing. Self-employed people, like real estate agents, have to pay their taxes on their own every quarter.

Because there’s no way to know exactly how much you will owe in taxes at the end of the year, you have to estimate what you will owe. This can be done in various ways, and it’s best to use a professional bookkeeper to make sure your estimate is as accurate as possible.

About the Penalty

The penalty is calculated based on when you owed the tax. Therefore, if you made a sale on January 20th, you would owe money on that sale at the end of that quarter, or on April 15th. If you chose not to pay until the year was over, you would be assessed a penalty based on a percentage of the tax owed. However, that penalty would be higher than one stemming from a sale made on August 1st, which would fall under the September 15th payment deadline. That penalty would start accruing after September 15th and would, therefore, be less by the time you paid taxes early in the following year.

How to Calculate Your Estimated Quarterly Taxes

To figure out how much you owe, you can estimate your tax obligation for the entire year and divide it by four. The steps you take to try to get your estimate as close as possible to what you will actually owe will vary based on how and when your income is realized. Generally speaking, you can start with the amount you owed the previous year and nudge it up or down based on how the current year is panning out, deals you have in the pipeline, and economic conditions.

IRS form 1040-ES walks you through the process of calculating your estimated quarterly taxes. It contains a worksheet with instructions outlining the arithmetic you need to do to calculate an estimate. It also has a schedule of taxes owed based on how much you make. If you choose to do this yourself, be sure to download the latest 1040-ES form because it will conform to the most recent tax laws.

The Benefit of a Profit and Loss Statement

Having a profit and loss statement makes it much easier to calculate your estimated quarterly tax obligation for several reasons:

• Your income and expenses are kept current. A profit and loss statement, when maintained regularly, will have the most current, accurate information regarding what you’ve earned.
• Your profits are clearly outlined. Trying to figure out net income by cobbling together disparate receipts and deposit slips is time-consuming and confusing. With a running profit and loss statement, the information is at your fingertips.
• You can make adjustments using info on your P&L. If you’re teetering on the brink of another tax bracket, you may want to make adjustments to how much money you bring in—or when. Shifting a sale to January instead of December, for example, may save you some money. With a profit and loss statement, you can calculate how to best time your income to pay as little taxes as possible in the current year.

With the services of a professional bookkeeper and a profit and loss statement, you can streamline the payment process and potentially save money during the current tax year. Reach out to Guardian Business Services and learn more.