Episode 371
Aug 27, 2021
Michael brings on guest co-host Kim Padgitt from The Tax Advantage to discuss Quarterly Estimated Taxes for small businesses.
Listen to "E371: A Guide to Quarterly Estimated Taxes (with Kim Padgitt)" on Spreaker.
EPISODE 371
Weekly Roundup
Discussion Topic
- A Guide to Quarterly Estimated Taxes
Quick Tips
- Create a digital filing system and keep your financial records
Sponsors
Transcript:
Sponsor message:
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Michael Reynolds:
Hey everyone, welcome to the massage Business Blueprint Podcast, where we help you attract more clients, make more money, and improve your quality of life. I'm Michael Reynolds.
Kim Padgitt:
And I'm Kim Padgitt.
Michael Reynolds:
We are your hosts today. Welcome. As you have discovered in the month of August, Allissa is taking the month off and this is our last episode of the month. My co-host today is Kim Padgitt. Kim, welcome.
Kim Padgitt:
Thank you.
Michael Reynolds:
Some of you who have been longtime listeners may recognize Kim. Kim is a part of our accounting team. I say accounting team as if we're a big company. We're a very tiny company, but we have an accounting team, and we're super excited to have Kim on the show today as my co-host. Kim is one of the owners of the Tax Advantage LLC. You've probably heard of Kim and her partner, Julie, on our show at various times in the past. They have joined us to talk about taxes and accounting and bookkeeping and all sorts of things related. They are our accountants as well. We are clients of the Tax Advantage and could not be happier. I know that, Kim, you and your team work with a whole lot of our listeners and community members as well. They're also very happy with you. So thank you for all you do for our members.
Kim Padgitt:
Thank you.
Michael Reynolds:
Yeah. All right, so Kim and I are going to talk about quarterly estimated taxes today, but before that, Kim, why don't you give a 30 to 60 second quick intro on you and the Tax Advantage?
Kim Padgitt:
Okay. The Tax Advantage is a company I started about 30 years ago with the intent of serving a population of people that other folks were ignoring. 30 years later, there are now three owners: myself, Julie [Pesix 00:02:33], Stephanie [Nelson 00:02:35]. We're grow our little company right along with our little, medium-sized businesses.
Michael Reynolds:
Love it. I love that you have the focus on very tiny businesses, like pretty much all of our listeners, all solo practitioners, very tiny businesses. And you're right, they often get overlooked by the big, expensive firms or even the medium-sized, expensive firms that charge more than these companies need to pay, and often don't provide the service they need. You have done a wonderful job of you and your team providing amazing service at an amazing price, which is just what our members need. We appreciate that.
Kim Padgitt:
Thank you.
Michael Reynolds:
Today, let's jump in first with our, "What are you reading?" I will go ahead and share what I am, not really ... I guess it's kind of reading, because it's an article I found on Buzzfeed, but it is a ... Obviously, you were around in the 80s, Kim, so you probably remember the Goonies. Do you remember the movie Goonies?
Kim Padgitt:
Yes.
Michael Reynolds:
Yes. there is a game, a board game called the Goonies Board Game, and the article title is from Buzzfeed, and it says, "If you're a child of the 80s, I guarantee you'll fall in love with this new Goonies board game." I remember watching the Goonies growing up as a kid. It was one of the first movies I ever saw actually. I thought it was fun at the time, obviously as a kid. Apparently there's a board game out, the Goonies Board Game, and it's gorgeous. If you look at the photos in the article, it's this really beautifully designed board game where you go on this adventure with the kids.
Michael Reynolds:
All the stuff they do in the movie kind of comes through in the board game's adventures. I thought it was cool. I thought it was interesting. I came across this recently and thought I'd check it out. For those who are children of the 80s and fans of board games, that might be worth checking out. The new Goonies Board Game is available. That's what I've been reading about. Not very useful, but just fun stuff. Kim, if I were to ask you what you've been reading, you'd probably telling me the tax code, right?
Kim Padgitt:
Yes. That seems to be changing daily as we speak. It has been more so than usual, because of all the significant changes that they've been making in the last few months. So yes, tax code.
Michael Reynolds:
Definitely more useful than mine, but probably not quite as interesting to mention.
Kim Padgitt:
Yours sounds fun.
Michael Reynolds:
All right. Well, before we move on to the topic we're going to talk about today, I'm going to share a shout out to one of our sponsors today, the original Jojoba company. Usually, Kim, I do a shout out. I'll do this whole Jojoba thing, and I have fun with it. I'm going to spare you my big yelling of Jojoba today. I'll just kind of be a little more normal about it. I do want to share that the Jojoba company is the only company in the world that carries 100% pure, first-press quality Jojoba, and we are thrilled to be partnering with them. Jojoba does not go rancid. It doesn't contain any triglycerides like many products do, so it doesn't go bad.
Michael Reynolds:
That makes Jojoba a great carrier for essential oils as well. Jojoba is also non-allergenic. It can be used on any client and every client without fear of allergic reaction. It's a really a great product to keep on your shelf. If you have clients that come along that have an allergy maybe you're not familiar with it, you can just say, "You know what? Let's just go with Jojoba. I know it's safe. It's not going to cause any allergy issues." It's really nice to have in your arsenal.
Michael Reynolds:
Our listeners get 20% off the price of Jojoba when you shop through our link, which is massagebusinessblueprint.com/Jojoba. That is spelled massagebusinessblueprint.com/J-O-J-O-B-A. Thanks Jojoba. We appreciate you being our sponsor. All right. So today, Kim, I am glad we are talking about a guide to quarterly estimated taxes. This comes up a lot, and it is really important, especially for our listeners who are by and large solo practitioners, solopreneurs, I'm sorry, sole proprietorships or LLCs, and quarterly estimated taxes are a fact of life for all of us.
Michael Reynolds:
I've got a few questions to kind of prompt the conversation, but having been doing this for decades, you have a lot to share. I haven't even thought about asking, I'm sure, when it comes to quarterly estimated taxes. I'm sure it'll be a great conversation, and the goal here is to guide our listeners to understand more about how they work and how to not get in trouble when it comes to quarterly estimated taxes and make sure you do things correctly. Let's start with this. Who needs to pay quarterly estimated tax payments?
Kim Padgitt:
Well, I will just focus on this group. I'll just focus on self-employed people, one member LLCs, and sole proprietors. There's a whole bunch of other folks that need to do it too, but we're just going to focus on this group. If you're a self-employed individual and get paid in a fashion that no one is withholding income tax, you are a person who needs to pay estimated taxes. It can vary from, "Okay. You work part time, and you're married, and your spouse or your partner is is a W2." It's not cut and dry.
Kim Padgitt:
What I usually tell self-employed people, the sole proprietor is, when you get paid at the end of the week, if you go, "Okay, I brought in $3,000 this week, and I spent 1000 on legitimate business expenses," so now you're looking at $2,000 profit. I think this would be a good time for profits first to come in. If you have a separate bank account called taxes, move 30% to that account. It's not your money. It's going to be set to either a federal or state agency at some time. Don't be of the mindset that, "Oh, I'll do that next time around. I'll just spend all this, and next time I will catch it up," because it gets very difficult to catch up if you get a few times behind.
Kim Padgitt:
Now, 30% may end up being too much for your family and your situation, but it's always better to err on the side of caution than to be sitting there at the end of the year, having not paid any estimates or not paid nearly enough, and now being told that you have to come up with several thousand at once. I've had that situation several times this year with people that come to us for the first time and they didn't understand about taxes and so they've spent the money. Once you get a year behind, it's even more difficult to catch up.
Kim Padgitt:
That's just an easy, easy formula for people. There are lots of caveats. You should be talking to your tax advisor a couple of times a year, checking in. Saying, "Okay, we've had a child, or my partner lost their job." There are lots of things that could mean that you have to pay less this quarter or you have to pay more this quarter. But at least if you're putting 30% aside out of every check, then you've got some money, some funds set aside for this purpose.
Michael Reynolds:
Let's dig into that one point you made just a little bit here as an aside. You mentioned setting aside money in a separate account. I'm going to go ahead and I would say most small businesses that I've seen, they have a business account set aside for quarterly estimated taxes, but I've always understood, and the best practice from what I understand, is to put that in a personal account because your business is not taxed.
Kim Padgitt:
Yes, yes.
Michael Reynolds:
You personally are taxed. It actually hits your personal 1040 tax return. Is it best practice to have a personal bank account set aside that you pay yourself a distribution from a business account, then you put aside that 30% into a personal account?
Kim Padgitt:
Absolutely. You can do that at the same time.
Michael Reynolds:
Then you pay the taxes out of the personal account.
Kim Padgitt:
Out of the personal account, correct?
Michael Reynolds:
That is technically the "correct" way, I guess. I guess, like most people do, what happens if you pay it out of a business tax account? Is there anything terribly wrong with that?
Kim Padgitt:
It's not horrible, it's just not best practices. If you're a one member LLC or a sole proprietor, It will just be considered a draw to you, and it will go in your equity section of your balance sheet. It's not the end of the world, it's just not best practices.
Michael Reynolds:
Sounds like a little bit of extra bookkeeping.
Kim Padgitt:
Yes.
Michael Reynolds:
Okay, got you. All right, so let's talk about a federal and state. Quarterly estimated taxes have to be paid at the federal level and the state level, correct?
Kim Padgitt:
Yes, unless you're fortunate enough to live in a state with no income tax.
Michael Reynolds:
Right, okay. Just to be clear, the dates are the same. When you're paying your quarterly estimated taxes, you want to set aside enough that you're paying the state and the federal amount. usually the state amounts are smaller, right?
Kim Padgitt:
Yes, unless you're unfortunate enough to live in a high tax state, but generally speaking, state taxes are a little easier to figure, because they're almost always per dollar after a few little deductions. Like you could get itemized deductions on federal return. Very few states let you have that. A few do, but very few. Yes, most states you would pay. Like here in Indiana, if you were going to pay on say $10,000 worth of income for the quarter, you would send to Indiana about $500. That's 3.25 or 3.23 for the state. The counties vary a little bit, which is why I say 5%.
Michael Reynolds:
Got you. Okay, that's why you say 30% to set aside, because thinking you're probably 20 to 24% for federal, an extra three to four to 5% for state, right?
Kim Padgitt:
Yes. In some cases, that federal could be higher than that because it's 15.3 cents on the dollar for FICA and Medicare.
Michael Reynolds:
Okay. I definitely want to get to the calculation part in a minute, but let's talk about just to recap when they are paid. They're called quarterly estimated taxes. Ideally it happens every quarter, but it's not always quite exactly on the quarter. Remind us what the dates are.
Kim Padgitt:
It is not. It's confusing. We are going to start with the first quarter. The first quarter of every year is paid on April 15th. Yes, April 15th, the same day that any balance due from the prior year is due. I don't know why they did it that way, but they did. Then the second quarter estimate is due 60 days later. Within a span of 60 days, if you didn't pay last year's taxes, you could have last year's taxes due, the first quarter, and the second quarter of the current year in taxes due. That's why it's important to pay those.
Kim Padgitt:
But the third quarter estimate is not due until September 15th. For whatever reason, they gave you four months between the third and the fourth quarter. The fourth quarter is not due until January 15th of the next year. Your fourth quarter estimate for 2021 is due January 15th of 2022. I'm not quite sure why they spread it out that way. There's two schools of thoughts. One school of thought is so they can ding the self-employed as much as they can. Another school of thought is to help them catch up if they did get behind, and then give them some time toward the end of the year. I don't know what school I'm in. It's the dates. Once you get in the rhythm of it, it doesn't much matter.
Michael Reynolds:
Yeah. To be clear, nobody reminds you of this, right?
Kim Padgitt:
Oh no, no.
Michael Reynolds:
You're just supposed to know to do it.
Kim Padgitt:
Whoever's advising you from an income tax standpoint, your tax consultant, should. They don't always. Most firms do is, when they file your prior year returns, say someone filed your 2020 return, they will say your estimates are attached to your 2020 return, but they have based that on 2020's income. Like last year, lots of people had a really, really bad year because of COVID. They just make the little estimates that was based on last year. When they get to the end of this year, they're probably going to owe taxes. Even if your tax consultant gives you the estimates for the whole year, I still advise you to check in with them at least by the third quarter, third and fourth quarter to say, "Okay, here's what's really happening in my world this year. Are these still legitimate tax estimates?"
Michael Reynolds:
Yeah, the IRS doesn't' send you a bill to remind you. You just have to do it.
Kim Padgitt:
Correct. They only send you the bill that says, "Here's your penalty for failure to make estimated payments."
Michael Reynolds:
You messed up and now you owe more.
Kim Padgitt:
Yeah. Yep.
Michael Reynolds:
Let's talk about calculation, because I think this is a mysterious area for a lot of us. This is a big question, so I'm going to try to break it down. The question is, how do you calculate your quarterly estimates? Obviously, one path is you talked to your tax professional, and we hope that our listeners are working with a tax professional, but some aren't for various reasons. Let's say you're not. Is there a do-it-yourself way to calculate these? I know there are some online calculators. How reliable do you think they are?
Kim Padgitt:
Before this podcast, I decided to go check some of them out, and they're clunky. I would think that the average person would find most of them confusing. For simplicity's sake, I would stick to the 30% aside rule, but you can go, "Okay, we made 40,000 last year, and we have two children under the age of ..." See, that gets into a whole different category. If you've got children, are you taking that child tax credit up front? Are you waiting to the end of [inaudible 00:17:04].
Michael Reynolds:
Yeah, they get more complicated this year.
Kim Padgitt:
They're way more complicated. I hesitate to give people formulas because I'm not sure what they're doing in the background that they cause them trouble. I would truly stick to the, "This is what I made. This is what I spent. Here's what I calculated, put aside for this."
Michael Reynolds:
You like that 30% rule [inaudible 00:17:31]
Kim Padgitt:
I do, because it's simple. People that are busy running their lives, running their businesses, taking care of families, want things that are simple, easy to remember. You could do that calculation per week, per month, per quarter, and it's still pretty darn consistent.
Michael Reynolds:
Okay. That kind of opens up the fact that we have to have good records showing profit. Just to clarify this again and recap, so the amount you would pay is based on your gross receipts, what you take in in sales minus what you spent. Let's say you're doing it every month. Seems reasonable to say, "Okay, for January, February, and March, we're going to calculate it. The amount we pay for the first quarter, April 15th, is going to be whatever we set aside." Let's say that's the scenario, seems reasonable. As a massage therapist, we're going to have to say, "Okay, we're going to look at ..." Let's say you're using a Square or some sort of payment system.
Michael Reynolds:
You're going to take in all your receipts. You're going to get a report from Square showing what your gross receipts were. Then you're going to look at either your QuickBooks or your bank statements, or however you track your expenses, add up everything that you've spent in those three months, or that month that you're calculating, do the math to subtract the sales from the expenses. Whatever's leftover is your profit. That profit is what you take 30% of for that month and move that into your separate, personal, bank account. Then over three months, you do that each month, and then take that amount and you break that up between federal and state and pay that as your quarterly tax payment. Am I correct so far?
Kim Padgitt:
So far, that is very accurate. It would depend upon what state, but you get to the quarter. "Okay, we're at the end of the third quarter here, and it's time to make our third quarter estimate." We had set aside say $5,000 for taxes. In almost every state, and there are some exceptions, I would say that out of that $5,000, probably 800 to 1200, dependent on your state, is being sent to your state and the rest is going to your federal.
Michael Reynolds:
Okay. So about a fourth to a fifth of it would be state.
Kim Padgitt:
Yes, dependent upon what state you reside in. Yes. You should be able to call whomever you're working with that does your taxes and say, "Okay, this is what I made. This is what I've set aside," and have them go, "Do this. Do that."
Michael Reynolds:
Okay. Let's say in the absence of that, you could look up your state tax rates. What would you Google to find that, for example?
Kim Padgitt:
It's very easy to look up. They're very happy to tell you what their tax rates , because they want to make sure you know.
Michael Reynolds:
That we pay it.
Kim Padgitt:
Say you live in Georgia. You could just Google, "Income tax rate for the state of Georgia," and it will come up.
Michael Reynolds:
Okay. I'm doing that right now. So income tax rate, Georgia, 5.75%.
Kim Padgitt:
You can do it for any state.
Michael Reynolds:
Google just returned it right there.
Kim Padgitt:
You could do it for any state and it just seems to come right up.
Michael Reynolds:
Okay.
Kim Padgitt:
That is easy.
Michael Reynolds:
Then you take 5.75% of that amount you set aside, pay that to your state, pay the rest of federal, and that's a reasonable way to approach it.
Kim Padgitt:
Yes. That's a very reasonable way to approach it. It might not be perfect, but using the calculators, what I find is it's kind of like with the D4s that people fill out when they're trying to become [inaudible 00:21:04]. They get confused with the question, so they claim too many dependents and too many things. Then you get to the end of the year and you still owe taxes. I try to keep it as simple as possible.
Michael Reynolds:
Got it. What about federal tax brackets? You say 30%, kind of saying, "Oh, we're assuming we're in the 22, 24% tax bracket." Do you ever ever see discrepancies where the tax bracket is much lower than you would expect based on that, or much higher and then you have to adjust for that?
Kim Padgitt:
Well, what I see is people that owe almost no federal income tax, but still owe self-employment tax. That is why I say 24, 25%, because there's almost no one in less than a five or 10% tax bracket. But every self-employed person ... Say you get to your tax return, and you're paying taxes on 30,000. That's what your business made, and you're married, and you've got a couple of dependents. By the time you get to the taxable income portion, you owe no federal income tax, but you still owe $4,500 in FICA and Medicare tax on that 30,000.
Michael Reynolds:
The 30% figure holds up pretty well.
Kim Padgitt:
Yeah, unless you are in a higher income tax bracket. In that case, you really should be talking to someone quarterly about your estimates and stuff. But for the average person, it holds up pretty well. If you've overpaid, the good news is, you'll get a refund or you'll tell them to keep it for the next quarter of estimates. It's not like if you overpay you're not going to get it back or get the advantage of it in some other way.
Michael Reynolds:
Okay, great.
Kim Padgitt:
I try to hold it to something simple.
Michael Reynolds:
All right. Let's talk about how to pay. I personally pay it online. I have an irs.gov account. I go online. I do ACH through my bank. Same thing with my state. How do you recommend people pay their quarterly estimates?
Kim Padgitt:
As of this year, we are really, really, really asking folks to pay them online, and that's because there's been so much trouble with the US mail and losing mail and estimates getting lost for months. Pay it online. Now, there has been some difficulties in the past. Trying to set up an irs.gov account until this year, only 30% of Americans could easily get that account set up. They couldn't get their selves verified. They've made it more simple to be verified if you actually want an IRS account, but you don't have to have an IRS account now. You just go to irs.gov and go make a payment, follow the prompts and it tells you how to make an estimated payment.
Kim Padgitt:
You get an instant confirmation. Save that confirmation. Send a copy of it to your tax consultant. It's done. You know it's done. You've got proof in your hand. If you mail them, I know that 90% of them are getting there, but if you're one of the 10% ... We had a situation last year with a gentleman that sent a big estimate in. They said they didn't get it. Then we went on irs.gov and he paid it. Then guess what? They found that estimate four months later and they cashed that too.
Michael Reynolds:
Of course they did.
Kim Padgitt:
I recommend people pay it online now. You get an instant confirmation that you have paid that you can save to your file.
Michael Reynolds:
The nice thing about having an irs.gov account, if you can get one created, is that you'll see your history there, right?
Kim Padgitt:
Absolutely. They now say that up to 80% of Americans will be able to do it. What they are going to use is the following. They're going to use face recognition. You have to scan in a driver's license and a few other pieces of ID, and then face recognition. They're doing things that should make it easier for taxpayers to get an account, to get verified and prove that they are who they say they are.
Michael Reynolds:
Interesting. On the note of tracking, I'm really big on tracking stuff as you know. I have my IRS gov account. By the way, let me back up a minute. Let's say you want to pay it online with the state. I usually Google, "Pay estimated taxes Indiana," and the first result will be the Indiana Department of Revenue website where you can go online and pay. It's really easy. That's just a quick tip on if you've never paid your state estimated taxes online, just Google, "Pay estimated taxes Georgia, or pay estimated taxes Alabama," and you'll find the online portal for doing that.
Kim Padgitt:
I would say that 45 out of the 50 states you can pay online.
Michael Reynolds:
Oh really? There's some that are still behind.
Kim Padgitt:
There might be some behind states. I won't mention them, but there could be.
Michael Reynolds:
Okay, All right. I also track things in a spreadsheet. I mean, this may be overkill, but I have a spreadsheet set up for every year, and I have little label saying, "Hey this is quarter one, quarter two, quarter three, quarter four." I say, "Here's how much I paid. Here's the date I paid. Was it federal, or was it Indiana?" I send it to you when you do my taxes, I say, "Here's my export of my spreadsheet. Here's my quarterly estimates." I like having that record. Do you recommend that? Is that overkill? Is it helpful?
Kim Padgitt:
I don't think it's overkill. I think it's a good practice to get into, because I can't tell you how many people come to me at the end of the year and say, "Well, I don't remember whether I made that estimate or not." Then they have to go hunting, because unlike you, they didn't save the confirmation. They didn't put it on a spreadsheet. We just had someone today that we said, "You're just going to have to go back through your bank statements for the whole year, because some of you paid late and see if you can find proof that you paid them."
Michael Reynolds:
So keep your receipts.
Kim Padgitt:
Yes, absolutely keep those receipts. Absolutely.
Michael Reynolds:
Yeah, when I pay online, it sends me an email that says, "Hey, here's your confirmation." I actually export those to PDF. Put them in a folder, save my emails. I save everything lik. I'm paranoid, so I want all those records.
Kim Padgitt:
It just gives you a good record. You can look back and go, "Okay, I'm on track. I'm doing what I'm supposed to do." I think that once you get in the groove of it, it's easy to do. It's hard to get started. It really is. When you're first self-employed, it's hard to see that discipline. When I started being self-employed 30 years ago, you couldn't do all this stuff online. I drove to a little town called Cumberland, Indiana, opened up a little bank account, made sure I had no bank card. I didn't have a checkbook.
Kim Padgitt:
Once a week I would mail the money. I would drive every quarter and get a money order and send my estimates in. It's just a matter of how you can get a discipline going that you can live with and be consistent with, and not let someone talk you into spending it on the weekend. That's what we find most of our people do. They think they'll put it back next time around, and it just gets too hard to do.
Michael Reynolds:
That's a really good reason to have a separate bank account for it.
Kim Padgitt:
Absolutely.
Michael Reynolds:
I'm a little extreme, but I recommend a whole, separate bank. I have my quarterly estimates in a different bank than my main personal bank, because I don't want to see it. I don't want to consider it part of my money. It's not my money. It belongs to the government. I've got to keep that separated.
Kim Padgitt:
Absolutely, yes. I don't need to do that anymore, but that's exactly what I did back when I first started so that I could keep it separate.
Michael Reynolds:
With online banks, it's easier now.
Kim Padgitt:
Oh yeah, much easier.
Michael Reynolds:
I just go to an online bank and just throw it in there. Let's talk about the dark side of this whole discussion, which is what happens if you don't pay these, or you pay the wrong amount? What are all sorts of bad things that can happen?
Kim Padgitt:
I tell people this all the time. They're like, "Well, I didn't pay my second quarter estimate. It's too late now." I'm like, "It's better to pay an estimate late than to skip a quarter." Usually the first year you're starting out, they're pretty laid back with your penalties and stuff, especially if you didn't know taxes the year before you started. But after that, they start kicking in failure to file estimates, failure to pay. Those can get pretty big, substantial, dependent upon what you owe. Say you owed five or 6,000, you can end up in the year two or three, owing four or 500 in failure to pay estimate penalties and interest.
Kim Padgitt:
It's just money you're throwing away, if you look at it that way. It's just really money you're throwing away, so don't do it. Just pay the estimates, do what you can. If you're not making enough money to support your household, and you'll know this, because you're going to have a budget of what your household needs to run, and pay your estimates, then you either have to look at the household budget and get rid of something, or you're going to have to consider doing something else, because you can't just keep running a business where you're not paying your taxes year after year. You just get in so deep that it's really hard to get out. Figure out a way to live on less or make more.
Michael Reynolds:
Let's say there's someone who has gone, let's say, five years without paying any quarterly estimates. What happens then? [inaudible 00:30:32] situations, uncover lots of details, but let's say they just haven't paid. They're like, "Oh boy, what do I do now?" Is it best to just admit it to the IRS and say, "Hey, here's what's happened? Can you work out payment plans?" You've probably seen this and worse in your career.
Kim Padgitt:
Oh yes.
Michael Reynolds:
So what then?
Kim Padgitt:
We see this often. What happens is, okay, you don't file the first year, and then you get worried about filing, so you just don't file. What I suggest people do, and we do this and help people with this all the time, go ahead and file all the returns. Once they're filed, then we will set up a payment plan for the back year, and show the IRS that we've developed a plan for the current year that you're going to be on track by the end of the current year.
Kim Padgitt:
If you set up a payment plan with the IRS for back taxes, and then you get to the end of the current year, and file, and haven't paid those taxes, or don't pay it with the return, it voids the [inaudible 00:31:34] agreement, and then collections kicks back in. You just do it. You'll be paying some penalty in interest for sure, but you got to start somewhere. You got to get back on the horse so to speak somewhere.
Michael Reynolds:
Sounds like there is hope.
Kim Padgitt:
There is hope, and we help people do it all the time.
Michael Reynolds:
Yeah. Okay, good. That's a great thing to hear. Wrapping up with the discussion, what have I left out? Any tips or pitfalls related to quarterly estimated taxes? Anything we haven't discussed that's important for our listeners to know about?
Kim Padgitt:
Well, I would really say that it is always better, like I said, to pay an estimate late than to skip an estimate. It's definitely better to overpay than underpay, because it's difficult to come up with a few thousand for most small businesses at years end, especially when that same day their first quarter estimate for that year is due. Just get in the mindset that that money is not your money. You're just holding it. It would be like employees.
Kim Padgitt:
Say they make 1000 a week, and they went to window one and they were handed their $1000, and asked to step two window two and had their taxes back. That's kind of what it is when you're self-employed. You've gotten all the money in hand, but it's not all your money. Part of it needs to go to taxes, so you should immediately step to window two, which in this case is a separate bank account and a separate bank and put the money there for safekeeping until you forward it on. We also have some people that we just have to make an estimate every month. Some people are better with that.
Michael Reynolds:
Okay, so you [inaudible 00:33:26] early.
Kim Padgitt:
They'll let you make as many estimates as you want to make.
Michael Reynolds:
They'll take their money whenever you want to give it to them, right?
Kim Padgitt:
Anytime you want to give it to them, they will take your money. If you are better with that, just do that and keep record of the monthly payments.
Michael Reynolds:
Got you. Yeah, one thing I do, I don't know if this helps anybody else, but I run a budget through YNAB, which is You Need A Budget. It's the budgeting software that Allissa and I talk about all the time. I recommend people prioritize their categories. The most important things to the top down to the least important things. You kind of have that priority in front of you on your radar. I put taxes number one, because I know that they are the thing that I least want to pay. So I purposely put that at the top to remind me that, well, even though I emotionally don't want to pay it, it's logistically the most important thing to take care of first.
Kim Padgitt:
It is.
Michael Reynolds:
Because you can't spend anything else until you've accounted for the taxes. That's the first line item on my budget as a household. That's probably a good practice for many of us to consider doing as well.
Kim Padgitt:
Absolutely.
Michael Reynolds:
All right. Well Kim, thank you. This has been a great dive into quarterly estimated taxes; what they're all about. I hope it's helped some of our listeners to wrap their head around how to approach it. Of course, we always recommend working with a professional like you and your team. At the end, I want to be sure we listen to the end, everybody, because I want to make sure you know where to find Kim and how to contact her. I know you do work in all 50 states and you work with a lot of our listeners all over the US.
Kim Padgitt:
Yes.
Michael Reynolds:
I will definitely touch base at the end to make sure that we get your contact information again. Before we move on to quick tips, let's give a shout out to our sponsor ABMP. We love partnering with ABMP, and they say they're proud to sponsor us, and we believe them. I'm going to talk about the ABMP education center first. You can find that at abmp.com/learn. The learning center or the education center has over 600 hours of CE courses included with your membership or available for purchase if you're a non-member.
Michael Reynolds:
The topics include hands-on techniques, ethics, self-care, cultural competency, and courses for massage educators. ABNP members get free CE for all courses included with your level of membership. It's a great way to meet your CE requirements, try out new presenters, and save your CE budget for other courses. Check that out at abmp.com/learn. All right, so quick tip time as we wrap up here. If you have any quick tips, I'm sure you probably do, because like I said, you have a lot of tips related to taxes and book keeping.
Michael Reynolds:
One of my quick tips I'm going to share is to create a digital filing system for keeping your financial records. One of the best things I think you can do is to set up a filing system, whether it's in Google Drive or Dropbox or some other cloud system. If it's locally on your computer, make sure you've got good backups running every night, but set up a file system that is your place to store all of your financial documents. Folders for your tax returns, for your estimated tax records, for your accounting records, for all sorts of financial statements that you might need and keep all that in a digital system, so you can access it quickly and conveniently.
Michael Reynolds:
So much of the time people are sifting through paper and trying to look through boxes and stacks and folders of paper, and that's extremely inefficient. I use an app called Scannable on my phone. There are plenty of apps out there, but get an app for your phone. If you have paper records, you can scan it quickly, shred the paper or file it, and then save the digital version in your file system. That just really makes a huge difference, in my opinion, when it comes to running your business and your life efficiently. What do you think, Kim, would you agree?
Kim Padgitt:
Well, I will say one thing. A tip that I would like to share falls into place with that, is save your receipts and digitally, it's how I would do it since we had the ability to do it. A lot of people think, "Well, it's on my bank statement, or it's on my credit card statement, so I don't need the actual receipt," but the government will tell you in an audit, "Okay, you went to Office Depot, but it doesn't say what you bought at Office Depot. Where's the receipt?" Yes, scan those receipts in. You can throw the paper away after you scan the receipt in, but scan those receipts in. You may need them.
Michael Reynolds:
The IRS does accept digital receipts.
Kim Padgitt:
Yes.
Michael Reynolds:
That wasn't always the case, but now it is.
Kim Padgitt:
Exactly, it is now the case, they do. They're finally being drug into the 21st century. They do accept.
Michael Reynolds:
Google Drive is nice because Google Drive will actually let you search the contents. If it's clear enough, it'll actually kind of do some character recognition. You can search your Google Drive and find the contents of receipts in those searches as well. That comes in handy too. I have a folder for every year of receipts. Like in 2021, for example, I'm going to move all my receipts over from my desktop into my 2021 receipt folder in Google Drive. That's where they are, so if I ever need to get them, I can go to that year, grab them all.
Kim Padgitt:
If you're super lazy, just within that year, just set a folder up for each month. At least you will know that looking at the bank statement, "Okay, that office Depot receipt that is in the January folder," so that will be a helpful way to find that stuff as well.
Michael Reynolds:
Right on. All right, well, thank you Kim.
Kim Padgitt:
You're welcome.
Michael Reynolds:
Great discussion on quarterly estimated taxes. Great quick tips. Pleasure having you on. I'm sure you'll be back because you're becoming kind of a regular on our show, so we appreciate that. Let's make sure our listeners know where to find you. Where's the best place to contact you and your team, Kim?
Kim Padgitt:
You can find us at taxadvantagellc.com. That's our website. You can call us at (317) 784-7402. My email is kim@taxadvantagellc.com. All those we'll get you.
Michael Reynolds:
We will put a link to your website in the show notes here as well. This is episode 370, and a reminder that Kim and her team work in all 50 states virtually. We've seen clients of Kim and her team all over the country from our listenership, from all across the US. You're very adept at working virtually with anybody, wherever they are in the country. We appreciate that. All right, well thanks everyone for joining us today. We appreciate you being a listener. As always, you can find us on the web at massagebusinessblueprint.com. You can email us at podcast@massagebusinessblueprint.com. Thanks as always for joining us. Have a great day. We'll see you next time.
Kim Padgitt:
Bye y'all.