One of the most common questions I get from business owners is how to record their estimated tax payments each quarter. Are they an expense? Should they be reported as some kind of liability payment? It’s all so confusing, right? Well read on to see how simple the answer really is!
Your Business = You
If your small business is a sole proprietorship and you file a Schedule C with your tax return each year to report your business activity, then the taxes that you pay each quarter are actually personal payments. You may be paying estimated taxes because of your profitable small business, but the IRS doesn’t really see you and your business as separate entities. The taxes on your business profits are intricately intertwined with your other personal income, your personal deductions and those of your spouse, as well.
So, in a perfect world, those estimated tax payments would be coming from your personal bank account. We don’t live in a perfect world, though, and many small business owners pay those estimated tax payments directly out of their business account. This is fine so long as you report those payments properly!
I have seen estimated tax payments reported as “Tax Expense” and even “Miscellaneous Expenses” in various QuickBooks files over the years. Both of these are wrong! Because those estimated tax payments are actually personal, they are not business expenses at all. Rather, they are treated the same as Owner’s Draws.
To simplify the tracking of estimated tax payments, I recommend setting up a new Equity-type account called “Owner’s Tax Payments” in the Chart of Accounts. By making this new account an Equity-type account, it does not affect your Profit & Loss Statement and properly treats those tax payments as draws on the profits of the business.
Not sure how to send those tax payments in to the IRS? You can use the Electronic Tax Federal Payment System (EFTPS) or IRS Direct Pay. Direct Pay is great for sending a quick payment, as you receive instant confirmation that your payment has been submitted and no pre-registration is required. You can also schedule a payment up to 30 days in advance, so Uncle Sam doesn’t get your money any sooner than necessary! While EFTPS does require a registration in advance, the actual process only takes about a week. The main advantage of EFTPS is the ability to schedule several payments up to 365 days in advance.
When tax time rolls around, it will be incredibly easy to run a report on transactions in that new account. You will know exactly when those tax payments were made and the amount of each.
What about when your business in an LLC? What do you do then? Read next week’s blog post on LLCs, then come back here with your newfound knowledge. (Hint: It doesn’t change much!)
Have a question about recording estimated tax payments? Leave a question below
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.