Small Business Bestie

34: Bestie Bites - Understanding Taxes with Expert Tips from Michelle

• Michelle Smock • Season 1 • Episode 34

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Curious about how to navigate the complex world of small business taxes? Learn the essential strategies for managing your quarterly tax payments effectively. Join me, Michelle, as I unpack the intricacies of different tax obligations—federal and state income taxes, withholding, sales, and even local taxes like those in Fayette County, Kentucky. I share my expertise as a co-owner of Cultivate Accounting, offering a practical guideline of setting aside around 30% of your income for quarterly tax payments while highlighting the critical importance of personalized professional advice. 👩‍🏫💯

Understanding your tax duties can be daunting, but it doesn't have to be. Let me guide you through distinguishing between various types of taxes to ensure you're not caught off guard. Discover the resources available through the Small Business Bestie website and how Cultivate Accounting can connect you with experts ready to tailor their advice to your unique business needs. Whether you use a payroll service for withholding or manage your own sales taxes, this episode aims to equip you with foundational knowledge to keep your small business on the right track. 💪🩵🧡🩷

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Small Business Bestie is edited by Bourbon Barrel Podcasting

Speaker 1:

Hey, welcome to another edition of Bestie Bites by Small Business Bestie, I'm Michelle, your host, and I'm doing another solo episode today because there's a topic that I wanted to chat about and just give you some basic information. Probably the second most asked question that I get as the co-owner of Cultivate Accounting, and that is how much should I pay for my quarterly taxes. So I want to start from the beginning here. Taxes are a crazy beast of an animal. I am not the expert, but I do own an accounting company and we have an expert on staff. So I'm going to give you the information that I know, the information that I have, and I'm going to tell you that if you need more advice, more guidance, reach out to either Cultivate Accounting or another accounting company and get an expert to help you craft the solution for your individual situation, because everyone's going to be different here. But I want to give you some basic information to let you kind of start to turn it over in your head and see where you land on all of this. So before we jump into estimated quarterly tax payments, let's take a step back and just talk about the different types of tax payments that we make throughout the year as business owners. So one of the first things that comes up is withholding tax. Withholding tax are taxes paid on wages. So if you have W-2 employees, you're paying withholding tax. Now, a lot of times this is happening behind the scenes. If you have a payroll processing company like ADP or Heartland Solutions or even QuickBooks Online Payroll, then all of this is happening in the background. They're automatically calculating the amount of withholding that needs to be taken out and they're submitting those payments to the proper authorities for you and then they're even filing the quarterly reports that kind of keep you in compliance with your withholding taxes. So more than likely, even if you have payroll, there's not a whole lot that you're having to do hands-on to deal with that, unless you are still doing manual payroll calculations, in which case your withholding taxes have to be calculated with each payment submitted to the proper authorities and then quarterly you turn in a report that says this is how much I should have paid you, this is how much I did pay you. Do you agree? And then they decide yes or no. So that's withholding tax.

Speaker 1:

Sales tax are the taxes that we charge to customers on behalf of the state. So if you are in a service or you provide products that are applicable for sales tax in the state of Kentucky. Basically, all you're doing is acting as a bank for the state, if you will. You're collecting the money for the state and then, as frequently as the state has determined that you have to, you then remit that back to the state. So sometimes you maybe don't have a lot of revenue that is applicable for sales tax and then they'll say you know what, just send it to us once a year, no big deal. And then if you have a little bit more, it becomes quarterly, and if you're doing a lot in sales, then they're going to have you do that report monthly. So that's your sales tax. Again, in Kentucky it's 6% and you're just acting like a holding vessel for the state, you know, holding onto their money for them until they want it from you.

Speaker 1:

Next is your income tax. Okay, so this is the big one, right? Your income taxes. You're going to have a federal income tax as well as a state income tax and you usually file those somewhere around the first of the year, before April 15th, right? So the income tax is the money that we're paying on the level of income for our family, however many people are in that family, and then you're remitting a certain percentage of that to the government either the federal government or the state government and then, as business owners, there's a couple of additional types of taxes that are also due. So every year we're going to file our profit tax and this is specific to Kentucky and a couple of other states, but we do have, like, our local profit taxes that are due. We also sometimes have personal property tax, so if your business owns tangible property, you can be taxed on that tangible personal property as well. So lots of things going on with taxes.

Speaker 1:

But the biggest question that we usually get is really centered around estimated quarterly tax payments, and those estimated quarterly tax payments are specifically for your income tax burden as a small business owner, so it's your self-employment tax, if you will. So the big question, right how much should I be taking out, how much should I be putting back to pay my estimated quarterly tax payments? And I wish I had a clear cut answer that was like this is the exact percentage you need to do, but I don't, because everyone's tax situation is a little different. But here's kind of the guideline, right, like a safe guideline, for how much to put back is 30%. It may be a little more for you, it may be a little less for you, but a good, safe guideline is somewhere around 30% is what you should be holding back and then remitting for your quarterly tax payments.

Speaker 1:

Okay, and then we have local taxes. Like I talked about a little earlier are profit tax. So in Fayette County specifically, we have the Fayette County Urban Government profit tax that we pay 2.25% of our profit goes to Fayette County and then we have the Fayette County School Board profit tax and that is an additional 0.5%. So that's a little harder to calculate because you know you're not really sure what your profit's going to be and that's kind of such a small number. But you can generally guess. You know, like, if your profit last year was $60,000 and you think you're going to do about the same, you can calculate that out and say okay, by the end of the year I need to have this amount put back for my local tax.

Speaker 1:

Oh, there's one more tax I want to tell you about. This is one that a lot of people don't know about and oftentimes they don't file, and then they can't figure out why the Secretary of State won't let them renew their business, and this tax is called the pass-through entity tax, also sometimes heard of as the LLET tax, but basically this tax in the state of Kentucky. They charge pretty much a flat rate to have an LLC or a pass-through entity in Kentucky and the tax is $175 every year. Now if you're a high-earning business, if you make over $5 million, then that number is going to be different. They're going to charge you more money, but for those of us with smaller businesses, that $175 stays pretty consistent. So don't forget to file that. Make sure that if you're doing your own taxes, that you do it, or if your tax professional is helping you, make sure that they get that LLET pass-through entity tax filed so that you don't end up in bad standing with the Secretary of State and then you'll also end up with some penalties and things like that. Nobody ever wants a penalty. Okay, so those are all the different types of taxes here.

Speaker 1:

Let's talk really quick about how to decide whether or not to pay estimated quarterly tax payments. It's really it shouldn't be a decision right, like if you're self-employed, just pay it, because there's a chance that you could get penalized for not. Nobody wants penalties, so just pay it If you're already saving the money back throughout the year, then why not just go ahead and remit it to the proper government agencies so that you don't have to worry about the potential of getting fined? So there are two different places that you have to send in your estimated quarterly tax payments, and I'll have all of this in the resources section on the website. You can find the guide for how to pay your estimated quarterly tax payment. There. I have a video that walks you through how to pay your federal tax to the IRS, and then I just have a step-by-step written guide for the state, because the state website is very easy to navigate. But you're going to log in to the IRS website and you're going to pay your quarterly tax there, and then you're also going to log in through the Department of Revenue for Kentucky and you're going to pay your estimated quarterly tax payment there. Now again, we've got those percentages of how much kind of goes to each agency.

Speaker 1:

Now when are your estimated quarterly tax payments due? So the due date on those is going to be on the 15th of the month following the end of the quarter, so January to March. So by April 15th you need to have your payment in for Q1, right? And then so on and so on. What I would recommend doing is just on like on the 5th of April, for example set a reminder on your computer, on your phone, on your calendar whatever, to sit down and calculate your estimated quarterly tax payment and then go ahead and remit them and just set that reminder each quarter so that you don't forget. So that's a lot of information.

Speaker 1:

Basically, what it boils down to is there's a ton of different types of taxes. Don't get them confused. Make sure you pay them all. And if you need any help, there's resources on the internet. I'll have that guide for how to pay your estimated quarterly tax payments on the Small Business Bestie website. So wwwsmallbusinessbestiepodcom. Go to the resources tab and you'll find it there.

Speaker 1:

And then, if you need any further help, cultivate Accounting we're always happy to help you. I'm not going to be the one to help you, but I will get you connected with our tax professional. And then you know there are tons of other amazing accounting companies here in the area. So if we're not a good fit for you, find yourself a great accountant that can sit down with you and really help analyze. You know. What has your business been doing over the past few years, what are your aspirations for the year coming up and kind of help you decide what those estimated payments should look like, and I hope that this has been really helpful for you. If you guys have any further questions, as always reach out, and thanks so much for joining me.