This elementary mistake cost me hundreds of dollars when I started my business.

I was a day (or 30) late and $1 (ish) short.

---

Key Point

• Most small business owners, including sole proprietors, are responsible for paying estimated taxes on a quarterly basis.
• If, like me, you underpaid your estimated taxes, you may end up with both a tax bill and an underpayment at the end of the year.
• If you’re not sure how much or when to pay your taxes, consult an expert or use trusted tax software.

---

Starting a small business independently is exciting. And in many states, it’s pretty easy, especially for sole proprietors operating in their own name. In some circumstances, you may not even need to submit any documents.

But there is one thing even small businesses usually need to do. And that’s the quarterly estimated tax payment.

Unfortunately, the “estimate” part of the equation is a little more complicated than expected.When underWhen it came time to file my taxes in the spring, estimating my taxes resulted in a very unpleasant penalty.

Estimate profits — but don’t aim too low

There are several ways to avoid overpayment penalties. The most obvious is simply to make sure you pay enough taxes. This means paying the lessor:

• 100% of the previous year’s tax amount, or
• 90% of this year’s taxes

(If last year’s adjusted gross revenue was $150,000 or more, the percentage will be 110% of the previous year or 90% of the current year, whichever is lower.)

Alternatively, you can avoid penalties if any of the following apply:

• No tax liability in the previous year (must be a U.S. citizen and the previous tax year covered a period of 12 months)
• experience extenuating events such as natural disasters and large casualties
• Became disabled in the previous tax year or the current tax year
• Retire (at age 62 or older) during the previous or current tax year, showing reasonable grounds for not making payments

For me there were two issues. The main problem was that it was the first year I worked alone. So when it came to estimating how much money I would make, I didn’t have a previous year to compare to. I couldn’t even do that.

Ultimately, the only option to avoid the penalty was to make sure we paid 90% of our taxes this year. But since you don’t know how much you can earn in a year, it’s become a very complicated guessing game.

And I lost.

On the one hand, it was a good thing. That meant I ended up making more money than I expected. rice field.

In the scheme of things, the charges were relatively small.But additional tax bill plus Penalties definitely added. It was a valuable lesson (albeit one I would have gladly done without).

When in doubt, ask a professional

If you think you may be eligible for a penal exception but are unsure how to obtain it, please consult a tax professional. In fact, it’s a smart move when starting a business anyway. They help determine how to properly estimate taxes, when to pay them, and other pitfalls to avoid.

Or you always have a software root. There are many popular small business tax software solutions. The small monthly fee I pay is well worth it for the peace of mind in knowing what and when to pay to avoid getting on Uncle Sam’s bad side (again).