You don’t pay taxes. They take taxes.
—Chris Rock, comedian, actor
I was anxious out of my wits as I sat in my chair waiting for the calculations to tabulate. I had dreaded this day ever since the previous January, when I knew I had only three months left until the deadline. On that early March day, my accountant hit the enter button on his keyboard with an accented motion and said nonchalantly without even looking at me, “You owe . . . ” I heard the astronomical number that followed, but it didn’t register as reality. I panicked inside, trying not to blurt out an expletive and bring unwanted attention to myself. What I had feared was actually happening. I owed the government more taxes than I could pay.
When I started my company, the only thing I knew about business taxes was that I had an EIN (Employee Identification Number) needed to open a bank account and that I would eventually have to pay corporate taxes. I had no idea how to plan for what I would need to pay annually in taxes, and frankly that was the last thing on my mind. I was more concerned with perfecting my product and trying to sell it. Likewise, when I started to make significant money, tax planning was not a priority. Because of my negligence, I ended up spending almost everything my company made to grow the business and to pay salaries. It was a novice mistake that I would literally pay for later.
If I could go back in time to give myself advice, I would have suggested that I search online (remember Altavista and Webcrawler?) for basic accounting information on corporate tax planning. I would have also advised myself to find an accountant who specialized in helping new businesses prepare for their impending tax obligations. Following this basic advice would have saved me the paralyzing stress of finding out that I was in over my head on tax day. Only a teenager when I started my company, I was terrified of what the IRS would do to me if I were delinquent. I thought IRS agents would arrest me, seize my possessions, and fine me at least $100 each day I was late paying them the money I owed.
Now that I am wiser and have an accountant who does more than crunch numbers for me before the annual corporate tax deadline of March 15, I have a plan to pay estimated taxes for my S corporation. Estimated taxes are based on your expected adjusted gross income, deductions, credits, and so on. According to the IRS website, “If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.” Those who opt to pay estimated taxes are required by the IRS to pay them quarterly. Following this method helps taxpayers avoid the sticker shock that I experienced the first time I owed the government a lot of money for taxes.
After receiving the bad news from my accountant years ago, I summoned my entrepreneurial creativity to figure out how I could earn money quickly to pay the tax bill. I came up with a plan and was able to pay what I owed on time. I learned my lesson well, and apparently I am not the only one. Over the years, I have heard similar stories from other entrepreneurial tyros. If you are just starting a company or already have one, don’t be like us. Make sure that you pay estimated taxes quarterly to avoid being chopped by the tax ax.