The Ridiculousness Of Estimated Tax Deposits

The system of Estimated Tax Deposits (ETDs) requires an individual in general to deposit 100% of last year’s tax or 110% of this year’s tax; whichever is lower. Since no one has a good idea of what they’ll owe in taxes this year, the simplest way is to base it on the prior years income tax return.

This process is patently unfair to Entrepreneurs.

Let’s say that in the previous year you paid tax a $200K and your ETD’s at both the Federal and State Level reflect that amount. What happens when something awful happens to your revenues?

Is there any reasonable way to determine what you should now deposit? Absolutely not with any certainty during the year.

We obviously need to adjust those deposits. There’s no reason continue making the larger ETDs, especially with lower revenues. But we’re always worried about under-depositing and putting you in a position where you’ll be forced to pay an Estimated Tax Deposit Penalty.

What happens if the example moves in the other direction? In the prior year you paid tax on $200K but this year your business expands significantly. You’ll now need to pay tax on $450K.

If you make your ETDs as proscribed, you won’t face a penalty, but you’ll still be significantly under-deposited. Hopefully you’ll put some money on the side expecting a much larger tax bill.

The Estimated Tax Deposit laws were put into place primarily for employees where their income didn’t increase or decrease significantly between years. As such, the system is detrimental to those of us who literally don’t know from one year to the next how much money we will or won’t make.

Let me leave you with this.

Another great difficulty is the concept of time. Let’s say that based on last year’s return, you’re required to make $7K ETDs at the federal level and $2K ETDs to the state. Those deposits are due in April, July, October, and January on the 15th day of the month.

What happens when you have a bad couple of months and can’t make your deposit? What happens in January after the holidays when you get back from your New Years Vacation and are cash poor?

One solution that I employ is to handle all of my ETD requirements through my payroll. This may sound foreign to many, but you can set up a payroll to make additional Federal and State Deposits to cover your eventual tax bill.

I can tell you that my net paycheck at Accounting Solutions every two weeks is $.01 cent. My wife doesn’t even show me the paycheck anymore.

All of my payroll goes out in Federal and State Tax Deposits to cover my ETD requirements. At that point I live off of the distributions that I take out of my S Corp and still maintain the reasonable salary requirement for a profitable S Corp.

It’s always easier to save for a larger bill in smaller increments. Since it goes through your payroll, its almost a forced savings type of program. Most of the time you won’t miss the money and you also won’t get into major trouble come tax time.

Doing this requires a payroll system that has some clue of what they’re doing in the first place. Half of the payroll companies out their treat payroll as nothing more than an inflexible computer program. Many of my clients have had difficulties employing this solution with several of the larger services.

But this is a solution that can work wonderfully for any Entrepreneur. It can also be adjusted annually once your income tax return is completed and we know what your new ETD Requirement is for the current year.

If you’d like to employ this solution, don’t hesitate to give me a call.

We’re all going to get through this. Let’s get through it together.

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Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,

Sincerely yours,

Chris Amundson

President

Accounting Solutions Ltd.

773-267-7500

888-310-0300

www.SalarySolutions.net

www.AccountingSolutionsLtd.com

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