How to Save Money on Taxes
Updated: Jul 13
Tax season is quickly approaching and like many people, you may have tons of questions about taxes, how to prepare better in 2020 and what you can do to save. Here's a simple trick that we share with business owners on how they can save money on taxes. Now, this may sound so simple that you will think it's too good to be true, but it's so simple, that missing it could mean you lose big.
File your 1040 ES Tax Payment Quarterly
I know you may be thinking "no duh..", but how many people are actually doing this? Many business owners don't realize that they get penalized if they don't submit an estimated tax payment every quarter. You could, in fact, receive a 1% penalty per month for the amount owed on your estimated tax payment. So let's say you owe $10,000 for Q1 and you didn't file or pay. Each month, you would be penalized for a late fee of 1% of $10,000 which is $100. You will then be charged $100 per month for every month that it's late and that's just for Q1. Imagine you owed the same or more each quarter? That's a hefty amount that adds up quickly. Ok so now the question is how do you manage your cash flow, file your 1040 ES and pay it on time each quarter? Well, I'm glad you asked because the solution is fairly simple.
Follow these simple steps:
1. Open Up a Separate Bank Account for Taxes
The reason you want to open a separate account is so that you don't see this money as profit in your operating account. When there are multiple bank accounts, this may alleviate problems that are caused by mixing business and personal finances (VirturalPostMail). Furthermore for those Limited Liability Companies (LLC), opening a business bank account can protect the owner's liability more effectively since they won't be combining business and personal funds (VirturalPostMail). Out of sight, out of mind is effective, especially when it comes to managing all the finances.
2. Monthly Transfer
Each month, transfer 20-25% of your net income to the tax account so that the money is put aside and not considered profit to be spent. By setting aside a portion, tax savings are created for the next coming year (USNews).
3. Submit 1040 ES Payment Each Quarter
Each quarter, you would take that 20-25% of your net income for the quarter and submit that payment.
It's important that we make sure that we file on time and you could avoid those unnecessary fees and eliminate any surprises at the end of the year. You can click this link to see how to pay your 1040ES payments quickly and easily online.
Make sure to check out our blog, 5 Things You Must Do to Prepare for Taxes for more tips and tricks.