Financial Figures

from Valley Business FRONT, Issue 163, April 2022

FRONT’n About

Calculating estimated payments

It’s a rare day that goes by without a business owner calling our office confounded over how to find the right number to report for quarterly taxes. This is a hard concept for people to wrap their heads around because it requires projections. Estimated payments mean you need to predict what your business will do in the future.

Whether you need to pay quarterly taxes or not is based on the profit of your business. Many startups operate at a loss. Most entrepreneurs take one to four years before they’re in the black. If you’re keeping good accounting records, you should know what your business did last year – and last quarter – so you can make a good guess about what you’ll owe, if you owe.

Profit means money left from income after you’ve paid all your expenses. Salaries (including yours), material costs, travel expenses, vendor fees, rent, utilities, office supplies, and merchant fees are all costs of doing business. These get subtracted from your income to determine profits.

It makes sense then that nobody can really answer what their profit is going to be until they know their numbers. Some businesses have a pretty steady rhythm year over year of inflows and outflows. Others are on a continuous growth curve. Seasonal businesses are cyclical. My tax preparation portion of the company is a great example of this. It’s extremely profitable during the first and second quarters, but quite variable during the third and fourth.

Technology is changing accounting

To determine estimated taxes, it helps to create a cash flow statement. Look at the current operations as well as prior years to see patterns.

New technology in the financial sector provides AI assisted accounting. This negates the time required for data entry by seamlessly connecting business account activity to QuickBooks. It also eliminates human error typing mistakes.

With such a solution, it’s easy to get the information you need to calculate estimated payments. If lack of time and organization are your excuses for not having up-to-date financials, this is an option that eliminates these challenges.

The IRS taxes you on net profit, not gross income. That’s what you need to be able to effectively project estimated payments. In order to do this, you need to know your cost of doing business, not just revenue. If this still confuses you, reach out and I’ll try to help you get a handle on it.