This Rookie Mistake Cost Me Hundreds When I Started My Business

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You're a day (or 30) late and a dollar short.

the main point

• Most small business owners, including sole proprietors, are responsible for paying estimated taxes every three months.
• If, like me, you pay less than your estimated taxes, you could end up with a smaller tax bill and underpayment penalties at the end of the year.
• Consult a professional or use reliable tax software if you are not sure how much or when to pay your taxes.

Being self-employed and starting a small business is exciting. And in many states, it's very easy, especially if you're a sole proprietor operating on your own behalf. Depending on your situation, you may not even need to submit any documents.

However, there is one thing that even the smallest business should or should not do. This is an estimate of quarterly tax payments.

Unfortunately for me, the "value" part of the equation was a little more complicated than I expected. And not filing my taxes resulted in a disastrous penalty when it came time to file my taxes in the spring.

Estimate your win, but don't aim too low

There are several ways to avoid fines. The obvious thing to do is make sure you pay enough taxes. This means paying the host for:

• 100% of the previous year's taxes, or
• 90% of taxes this year

(If your adjusted gross income for the previous year was $150,000 or more, the percentage increases to less than 110% year-over-year or 90% year-over-year.)

Alternatively, you can also avoid penalties if you pass in any of the following situations:

• No tax liability for the prior year (you must be a US citizen and the previous tax year must cover a 12 month period)
• In the event of an extraordinary event such as a natural disaster or serious injury
• Deactivated in the previous tax year or the current year
• Retired (age 62 or older) with proof of a valid reason for not paying during the previous or current tax year

For me, the problem is twofold. The main problem was that it was my first year self-employed, meaning I couldn't compare it to previous years when estimating how much money I would make. And since last year wasn't a full tax year (for various reasons), I can't even take advantage of that privilege.

In the end, my only way to avoid the penalty is to make sure I pay 90% of my current annual taxes. But without knowing how much I would make that year, the guessing game got very tricky.

And I lost.

On the one hand, that's a good thing. This meant that I ended up making a lot more money than I expected. On the other hand, it also meant that I owed Uncle Sam more money, and he charged me additional fees that I had not paid up before.

In the scheme, the cost is relatively small. But the bill for additional taxes and fines is sure to grow. It was a valuable lesson (although I would be happy without it).

If in doubt, consult a professional

If you think you qualify for a waiver but aren't sure how to get one, consult a tax professional. In fact, this is a smart move when starting a business. They can help you decide how to properly estimate your taxes, when to pay them, and avoid other pitfalls.

Or there is always a program path. There are thousands of popular small business tax software solutions out there. It's well worth my small monthly fee, so I know what to pay for and when to avoid being on Uncle Sam's bad side (again).

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