Estimated Taxes: The Number Shouldn’t Be a Surprise

Estimated taxes are one of those things that can feel pretty straightforward when someone first explains them to you. You figure out what you’re likely to owe, make payments throughout the year and avoid getting hit with one enormous tax bill at the end.

Except your business doesn’t stand still for a year.

You may start January expecting one level of revenue and find yourself having a much better year than you planned, or you may lose a client, add employees, increase your own compensation, make a significant investment or watch your margins change in ways you didn’t anticipate. Meanwhile, that estimated tax number can keep sitting there looking very official, even though the business it was based on looks completely different.

That’s where estimated taxes become less of a tax deadline issue and more of a financial planning issue.

An Estimate Is Still an Estimate

For many business owners, estimated tax payments are based on information from a prior year or on assumptions about what the current year is going to look like. That gives you a place to start, but it doesn’t necessarily tell you where you’re going to finish.

If the business grows significantly and nobody revisits the numbers, you could be setting aside less than you’ll ultimately need. If the year turns out differently than expected, you could be making decisions around a tax estimate that no longer reflects what’s actually happening.

The point isn’t that one good month means you need to call your CPA and redo everything. When the business starts to look significantly different than it did when those estimates were calculated, it’s probably time to take another look.

The Tax Money Is Still Cash

This is the part that can get lost when we talk about estimated taxes as a tax issue.

That money is sitting in the same overall financial picture as payroll, rent, new hires, equipment, owner distributions and everything else you want the business to be able to do. If you haven’t intentionally planned for taxes, it can be very easy to look at the cash in the bank and assume more of it is available than actually is.

Then an estimated payment comes due and suddenly money you mentally had earmarked for something else needs to go to taxes.

That can put you in a position where you’re moving money around, delaying something you wanted to do or dipping into cash you would rather have kept available for the business. The problem isn’t necessarily the tax payment itself. The problem is that it wasn’t part of the cash plan.

I would much rather know that payment is coming and account for it before we start deciding what else the business can afford.

A Great Quarter Can Change the Conversation

When the business is doing well, it’s easy to focus on the good news. Revenue is up, cash is coming in and maybe you finally have room to make some of the moves you’ve been waiting to make.

That’s also exactly when I want to make sure we’re looking at the whole picture.

If you have a quarter that comes in significantly ahead of expectations, that may change your projected profitability for the year, which may mean it’s time to check in with your CPA about whether your estimated payments still make sense.

That doesn’t take anything away from the win. I want you to celebrate the good quarter, but I also want you to understand what that good quarter means before all of that additional cash gets assigned somewhere else.

The same thing applies when the year isn’t going according to plan. If the business has changed significantly, your financial conversations should change with it.

Your CPA Needs to Know What’s Happening Now

Your CPA can help you determine what you should be paying and advise you on your tax strategy, but that conversation gets a lot more useful when they have current information instead of finding out months later that the business had a very different year than expected.

This is one of the places where having a finance team involved throughout the year can make a real difference.

At MOD Ventures, we’re already looking at what’s happening with revenue, expenses, profitability and cash, so when something changes enough that it may affect the tax picture, we can help make sure that information gets into the right conversation.

We’re not calculating your tax liability or replacing your CPA. We’re helping connect what’s happening inside the business with the planning that needs to happen around it.

Make the Payment Part of the Plan

I don’t want an estimated tax payment to feel like something that happens to your business every few months. You know these payments are coming, so they should have a place in the cash plan alongside the other obligations and decisions you’re managing.

That means having current financials, understanding how the year is actually going, setting cash aside with intention and checking in with your CPA when the business moves far enough away from the original plan that your estimates may need another look.

You’re never going to know exactly how every year will unfold, and you don’t need to. What you need is enough visibility to recognize when the picture has changed and enough time to adjust before a tax deadline forces the conversation.

That’s the difference between simply making estimated tax payments and actually planning for them.

If you need a clearer picture of what your business can afford, what needs to be set aside and what’s coming next, let’s talk about the financial support MOD Ventures can provide.