Financial Wisdom: Understanding Quarterly Tax Payments and Safe Harbor Rules

EP 144 - Financial Wisdom: Understanding Quarterly Tax Payments and Safe Harbor Rules

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Introduction to Quarterly Tax Payments

Do you dread, sorting through intimidating notices from the IRS? Are you puzzled over complex rules for estimated taxes? Take heart, my friend, you're not alone. This can get really confusing. Well, join me today is I demystify quarterly tax payments, safe Harbor guidelines, and more, this is a show you don't want to miss. Get ready to master the estimating process and safeguard your business and your personal life from penalties. I'm going to even share a personal story with you later in the show. Yes. Even, I have to consider this issue.

Welcome to Ask Ralph Podcast

Welcome to the Ask Ralph Podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines, and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting.

Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all [00:01:00] things financial. Now here's your host, Ralph Estep, Jr.

Tax Talk Thursday: Navigating Quarterly Payments

Welcome to our tax talk Thursday show. I'm so glad you chose to join us. I just want to thank you for listening and more importantly, supporting the program. I'm coming to you from the Estep farm in his Saggio accounting studio on this beautiful sunny day. Let me put on my podcaster hat or my flag hat is I have own today, put down those overalls and the adding machine gets moved to the side. And let's get into some financial wisdom from a Christian perspective.

Understanding Quarterly Estimated IRS Payments

Today, we're tackling a topic that strikes fear in the taxpayers across America. And that's quarterly estimated IRS payments. As small business owners. Individuals with untaxed income or self-employed workers. You're required to prepay taxes on income, not subject to withholding. That means actually projecting your yearly earnings, calculating complex percentages and submitting payments each quarter. Missed or. Inaccurate installments, often trigger frustrating [00:02:00] penalties and those nuisance notices from the IRS. The estimating process can feel like walking through a confusing maze blindfolded. From incomprehensible, IRS notices to elusive waiver requirements. It's enough to make your head spin.

Well, my friends spin no more in today's show. I'll shed some light to brighten that dark maze. We're going to explore critical guidelines for quarterly tax payments, qualification rules for penalty, waivers, and key safe Harbor provisions. To keep you out of paying penalties. I'm also getting personal by sharing my own turbulent journey, grappling with estimates as a budding entrepreneur, after just starting my accounting practice. From painful penalties to hard learned best practices. It's a ride filled with turbulent twist and turns. My prayer today. And my goal is that you avoid similar pitfalls on your financial path. So grab your calculators and notebooks folks. Class is in session. Let's master the quarterly tax estimating process together. Financial freedom. [00:03:00] Here we come.

Now don't forget to subscribe to the show and join our email list. You do that at askralphpodcast.com . So you don't miss tomorrow show tomorrow. I'm going to be talking about the importance of getting on the same page as a couple, when it comes to your finances and some practical ways to make that happen. This is vitally important. So I encourage you to listen to the show tomorrow. I want to remind you. We also just launched an insider's group on Facebook and I encourage each of our listeners to join the group, to continue the conversation from the show. You can share ideas for the show. You can discuss your triumphs and overall have a great conversation. I'll put a link to the Facebook group in the show notes today.

Well, let's start our discussion today with a Bible verse. This comes to us from second Corinthians chapter nine, verse seven, and it says this. Each one must give, as he is decided in his heart. Not reluctantly or under compulsion for God loves a cheerful giver. You know, that's not exactly talking about estimated taxes. That's talking about giving to charity. [00:04:00] But it was appropriate for today's discussion.

 So to kick things off let's review key guidelines for making quarterly estimated tax payments to good old uncle Sam. As a refresher self-employed taxpayers and small business owners typically receive income, not subject to withholding. They're not getting those W2 forms and not getting that weekly or bi-weekly paystub. It also applies a taxpayer who has income, which is untaxed at the time of receipt. This could be things such as bank interest, maybe dividends, stock sales, and a host of other items maybe sold a property, or you sold your primary residence. And there's a tax burden that includes revenue from clients, customers side. Jobs you name it. Since these earnings aren't taxed up front via paycheck. Withholdings. The IRS requires us to pre pay taxes through what they call quarterly installments. That way they receive steady income instead of waiting until you file your annual tax return. They don't want to be the last one to get paid. And the truth is folks. They levy heavy penalties. If your payments fall [00:05:00] short. So this accuracy and these paying a quarterlies is critical.

Here are three key things to know. Number one. Estimated taxes are paid in four installments on the following dates. And I know you're getting ready to tell me, Ralph, those dates make no sense. They're not the end of quarters. You're right. But this is the dates they set. And that's April 15th, June 15th, September 15th and January 15th of the following year. So mark those deadlines in your calendar folks.

Number two. Each payment must equal 25% of your total expected tax liability for the year. That's an estimate of the total income taxes you'll owe federal state self-employment and any other. So yes, some states actually require you to make these quarterly estimates as well. And in my experience, some states are a little, even more aggressive on going after these things.

And number three, if your income varies drastically between quarters, your installments are able to fluctuate. Just be sure total payments meet certain thresholds by the [00:06:00] final January deadline. We'll talk about more of that in a bit, but if your income. Isn't always the same. You can vary your estimates. I always tell clients this, the bottom line is that you want to try to get all those estimated taxes paid within the timeline they require.

Personal Journey: Learning the Hard Way

Now let's get personal, and rewind towards the early days of my business. I told you I'd share some personal information. As an optimistic young entrepreneur, I felt invincible and ambitious. My client roster grew steadily while income mounted month after month. Before I knew it taxes were the furthest thing from my mind. I worry about everybody else's taxes, but not mine. I was solely focused on servicing customers, not number crunching percentages for good old uncle Sam. By mid April, hadn't even given quarterly payments, a single thought. Well that blissful bubble soon burst my well-meaning wife gently nudged me to examine my tax obligations more closely. And she said, Ralph. Don't you have a tax payment to make. What I discovered downright terrified me. If I didn't whip estimated tax payments in the shape, quickly [00:07:00] painful IRS penalty. surely awaited. Talk about a panic filled, few days, folks. I scrambled to calculate earnings estimate my yearly tax liability and submit a massive first payment. Luckily disaster was narrowly averted because my wife reminded me, but oh, I learned the hard way. Quarterly estimates wait for no one, not even me. And this is what I do for a living. Diligence is required well in advance of deadlines.

Navigating IRS Notices and Safe Harbor Provisions

Now, as vital as, projections and percentages are quarterly, estimates would be incomplete without discussing the infamous notice and the form 2210 talk about dreadful. I assure you friends opening your mailbox to find this unexpected letter is not a joy. And I get calls from clients routinely about these. Form 2210 means the IRS believes you significantly underpaid, estimated taxes for the year. And without proper action penalties are going to swiftly follow. Few taxpayers, understand what triggers this notice or how to respond correctly. So allow me to shed some [00:08:00] light on potential causes and solutions. We're going to dive right into it.

The first one is income spike that wildly outpaces estimates. If you're a business explodes mid year, far beyond your projection, you've inevitably fall behind on quarterly payments. You scrambled to submit more before each successive deadline to minimize your penalties. You might even request a penalty waiver. If certain rules are met. We'll talk about those later in the show.

Number two major life changes, decreasing taxable income. Did you experience prolonged illness or disability that dramatically lowered your earnings? Life throws us curve balls. Sometimes that's just the inevitability. Consider filling out an IRS waiver, highlighting special circumstances that hindered your ability to estimate taxes accurately. The IRS has to abide by something called fair administration of tax. And if it's not fair, you can ask for a waiver and ask them to waive those penalties.

And number three safe Harbor provisions may offer penalty protection. Even with underpayment, you can still [00:09:00] avoid penalties by meeting a minimum payment thresholds under what they call the safe Harbor rules. So let's unpack those all important, safe Harbor provisions.

The aptly named safe Harbor guidelines can truly rescue taxpayers from penalties for underpaid, quarterly estimates. Here's what they essentially mandate you to prepay at least 90%. Of your current year liability or a hundred percent of the prior year amount, whichever is less. Follow that rule of thumb and you navigate clear penalties at tax time. When clients come in and get their taxes done. And they owe money. That's one of the key things. We look at what I have found in my practice. A lot of clients don't understand this. I will give them quarterly estimates. And they'll say to me, Ralph, don't worry about that. I'll just pay him at the end of the year. Well, that sounds good. But I don't want to get sued. So I'm going to give you these quarterly estimates. So that next time, when you get that IRS notice and you call me and you say, Ralph, they're charging me a penalty, I can say to you. That's right. And that's why I gave you those quarterly [00:10:00] estimates to pay.

So say your income decreased substantially this year after a more profitable prior period. Using safe Harbor provision you'd base quarterly payments off that lower current year figure rather than the now outdated, larger amount from 12 months ago. Uncle Sam provides that flexibility. So taxpayers aren't penalized for overpaying outdated estimates. So keep those guidelines on top of mind when you're calculating them.

 Now last but not least. What if you simply cannot afford quarterly payments equal to 25% of your expected taxes? The IRS understands cashflow crunches all too well. Individuals at less than a thousand dollars total tax liability can bypass quarterly payments all together for incomes up to 150,000. You may qualify to base installments on 90% of the current year taxes due. That's a bit of leniency goes a long way for struggling taxpayers.

Action Steps for Managing Quarterly Payments

So let's talk about some action steps. I can give you all kinds of great information, but I want [00:11:00] to give you action steps. You can take. So if quarterly estimates fill you with frustration, take heart. There are simple solutions. Here are five action steps for pain-free payments.

Number one. Carefully estimate your full year taxable income and expected liability. I would recommend you some tax prep software, or an accountant here. This is where I strongly recommend meeting with a tax pro.

Number two. Divide that yearly figure evenly by four installments. This isn't rocket science or modify as needed between quarters given income fluctuations.

Number three, double check your work. You don't want to make a mistake. Submit payments by each deadline and breathe easier at tax time. While we're here. I would highly recommend you create an account with irs.gov. I did a show about that a few weeks ago and make those payments electronically. And if you've got to make state payments, I encourage you to do that electronically as well. That way the IRS or the state can't [00:12:00] argue that the payment wasn't made and then what you want to do is follow up. Make sure it hits your bank account.

 number four. You want to research penalty, waivers and safe Harbor rules in case your situation warrants, their protection. Knowledge is power. If you listen to my show, you know, I talk about this all the time.

And finally number five. Reach out with questions. I'm, always ready to clarify confusing tax topics at our website. And you know what that is. That's askralphpodcast.com . You've got this, my friends. And let me help you.

Recap and Final Thoughts

Well, let's recap a bit what a whirlwind discussion on the ever complex world of quarterly estimated payments. These things really annoy people. I've had many kinds that said, you know what? The IRS can pack sand, I'll pay them at the end of the year. And I just remind them. That's fine, but don't argue with me when you get that bill in the mail for underpayment penalties. So in summary. self-employed taxpayers must divide total expected, yearly tax liability evenly. Into four installments with deadlines. As [00:13:00] we talked about on the 15th of April, the 15th of June, the 15th of September and the 15th of January of the following year. Aim to have at least 90% of eventual taxes for the current year paid by that January deadline to avoid penalties.

And if you need to use those safe Harbor provisions as a shield. If your income decreased substantially. And explore other penalty relief. If a major life events impeded your ability to pay estimates properly. I pray today's show brought some clarity about quarterly payments while inspiring you. To stay on top of estimates without anxiety. You got this, my friends, God graciously equips us to handle all the numbers. The percentages and notices sure to. Come, just take things step by step and breathe deep through each deadline.

Before signing off. I want to remind you again, to swing by askralphpodcast.com to access our show notes from today's episode. And if you know someone who's having issues with quarterly tax filings, I encourage you to [00:14:00] share this episode with them and please share this show with friends or family who needs some financial guidance.

And finally drop me a line with lingering tax questions. Anytime you can do that right on the website. And as I always say, stay financially, faithful out there, folks, and God bless you today.

Thank you for joining us on the AskRalph podcast. And with a simple click to subscribe, we'll invite you back to our next episode. And remember, financial issues don't have to be complicated. Just AskRalph. The information contained in this episode of AskRalph is based on data available as of the date of its release.

Sagio Accounting Plus and AskRalph Media Inc. is under no obligation to update this content if changes occur. Applying this information to your specific situation requires careful consideration of all facts and circumstances, and any information provided is not to be considered as financial, tax, or legal advice.

Please consult your tax advisor or attorney before acting on any material [00:15:00] covered.