Income Tax Projections

[HCHTech]

Per the title, how are you doing them during the year? Do you ask your accountant to prepare formal projections from time to time or are you using an online calculator? A spreadsheet? some other method?

I had the very happy problem this year of NOT owing as much tax as I was expecting. In fact my estimates were way too high - I had set aside quite a pile of money to cover this expense but ended up getting a refund for the first time in about 10 years. My business revenue and my personal compensation was higher than last year, so I falsely assumed my tax bill would be commensurably higher as well. I'll add that I do appreciate that 2020 was the wrong year to expect accuracy of any taxation estimates.

Pretty much ever since I hired an accounting firm to do my taxes & filings (about a dozen years ago now), I've stopped trying to do projections during the year. I use revenue/profit as a yardstick and then just make sure I have money set aside in case I have to come up with a big check on April 15th.

Given the magnitude of last year's pleasant mistake, I'd like to work harder on better estimates of my ultimate tax liability this year, but I imagine if I ask for something formal from the accountant, it will definitely be billable - so I want to make sure the effort is worth the expense if I go that route.

I've had to pay quarterly estimates ever since my business started making real money, so a long time now. The whole estimates game seems, well, imperfect. Your estimates are based on LAST YEAR'S numbers, so if your revenue/profit & actual tax liability is different THIS year (which I guarantee, it is different every year - how could it not be?) then when you get to the end of this year, you have always paid either too much in estimates or too little. So the whole system does NOT get more accurate as time goes on. In fact, if you have an exceptional year - like we did when Windows 7 went EOL - you KNOW the estimates calculated for the following year are going to be overstated.

Am I the only one who worries about this stuff?

 

[Sky-Knight]

I pay mine monthly based on my P&L in Quickbooks.

 

[HCHTech]

I should clarify that I'm an S-Corp, so I'm talking about my personal income taxes.

 

[Big Jim]

I don't know how different it is in the US, but I keep my accounts current in a spreadsheet and have it calculate tax monthly for me, then put that much aside in another account each month. fairly basic maths in honesty

 

[Sky-Knight]

I should clarify that I'm an S-Corp, so I'm talking about my personal income taxes.

Doesn't change much other than where you get your income number per month. Your CPA should be telling you what your general percentage of taxes are, and you multiply your income against that percentage and prepay.

 

[HCHTech]

I'll grind through it, but things change enough each year that it's just not that simple. The tax bracket rates are easy, they are fixed and known early in the year - It's the guessing of what my final AGI will be each year that is more difficult. AGI = my (and my wife's) W2 plus business profit less our not-insubstantial health insurance premium less retirement contributions, less a fun thing called Qualified Business Income Deduction - difficult to calculate before year end. When you are at June 30, and looking at YTD profit in Quickbooks, projecting what the final 12/31 answer is way more difficult than just "times 2". Even if you are at November 30, the answer isn't 12/11.

This past year, the PPP money and the changing view on how that might affect profit made me throw my hands up, maybe that was most of the problem. That last minute gift (seriously, signed on 12/27/20) of not counting the stimulus money as income AND still being able to deduct the business expenses paid with that money I don't think could have been predicted. In my case that was a swing of $50K. No wonder my guesses were off.

Also, in the US, the standard deduction increased so much a couple of years ago that itemizing deductions went away for a lot of folks. That made charitable contributions basically not count, for example. We're not philanthropists, but we give away about $5K each year, so it's not nothin'. I wasn't paying enough attention to notice that until the end of 2019 - I wish I had. In 2020, the business had a banner December, which boosted our year end profit by probably $20K over what it would have otherwise been, and I don't think I would have caught that impact even if I had been doing more careful projections during the year. That 20K went straight to my K1.

Anyway, I'll try to be more careful with projections this year - I don't want to over-compensate and get an unexpected 15K bill next April 15th.

 

[Markverhyden]

You know you can do prepayments anytime you want. It's not just limited to the 4 quarterly's.

 

[Sky-Knight]

Oh I know... the tax code is a mess... thank you Intuit and H&R Block!

But really, I just do what my CPA tells me to do. And yet... he has a sign on his desk that says "Accountant - Someone who does precision guesswork, based on unreliable data, provided by those of questionable knowledge."

Which really sums this mess up better than anything else I've ever seen!

 

[Markverhyden]

Oh I know... the tax code is a mess... thank you Intuit and H&R Block!

But really, I just do what my CPA tells me to do. And yet... he has a sign on his desk that says "Accountant - Someone who does precision guesswork, based on unreliable data, provided by those of questionable knowledge."

Which really sums this mess up better than anything else I've ever seen!

No argument with that.

 

[HCHTech]

You know you can do prepayments anytime you want. It's not just limited to the 4 quarterly's.

Yes, absolutely. You don't even have to deposit the quarterly amounts determined with last year's returns if you think they are too high based on this year's numbers. It's just that if you do that and underpay your ultimate liability by more than 10%, there are penalties. My problem is not making payments, it's trying to hit the bullseye (or at least hit the target)! Last year, I overpaid by so much, it covered all of my quarterlies for 2021 plus had $$$ set aside to cover the expected further payment due with the return, so I'd like to get a little closer this year - I could have used that money during the year. Hell, if I'd have bought DOGE with it, I'd be retired now!

 

[Nocturnal]

I'm probably heading for the best year out of my entire business's existence. Which, of course, I am extremely grateful for.