So you started a business. You quit your job, started the business
but what you were realizing is that it's a lot of work. It's very
stressful. Your first year might not be doing so
well. You might be realizing losses. You are
going through heartache. You're working your
ass off and for what, just to lose money. But then something turns around. Your
business starts to become profitable. You're starting to actually
make money now. You're able to afford your rent, your
bills based off of the income you're making.
It's great, you're feeling good because your business is growing so much
and you're just making it drizzle all over the place.
And you feel good about yourself until you start to prepare your taxes.
That's where you kind of get hit with the sense of the dose of reality
because then you find out that you owe what? $15,000!!!
So you hire a CPA and he tells you that you owe
$11,000 and that you have to pay quarterly estimated taxes.
So what exactly is quarterly estimated taxes?
It's basically you estimating the amount of taxes that you're going to owe for the
current year and you're paying it in advance each
quarter. That might seem weird to you but if you ever had a job,
that's basically what your employer is doing with your salary. You know how you
have your taxes withheld from your paycheck?
Your employer is taking that tax away from your pay
and they're paying it to the IRS on your behalf.
So when you own a business, you essentially have to do that on your own.
And when you own a business, you are required to do that.
If you don't then you will face a penalty. And
if you don't do it enough, or if you have an installment plan in place,
an installment payment plan, then that could void your payment plan.
The IRS says that it's required by law that you pay estimated taxes every
quarter. You know just how it's required by law
that you have to pay your taxes on time. And you're not going to go to jail if
you don't, you're just going to have to pay some penalties
and fines. Now I know the title of this video is very controversial
and what I'm going to talk about now might be controversial among other CPAs and
accountants. But it's just the real truth. I'm trying
to zoom out of just focusing on just taxes okay. So
why you maybe shouldn't pay estimated taxes.
I'm not saying that you should go spend all of your income
and pay yourself and you know, spend it on whatever.
I still think that you should save the money that you would have paid
estimated taxes for. You know there are some scenarios that I would like to
ask you or challenge you to think about whether or not you really should be
paying estimated taxes. So I made this video in
the middle of a pandemic okay. And while right now, at this moment,
the economy is doing, it's doing okay depending on who you are or what
industry you're in. It also comes with a high amount of
uncertainty. So with a high amount of uncertainty,
you kind of would want more cash in your pocket than
paying it out to the government where you can't access it anymore.
Does that make sense? In times of disasters or crisis,
I would argue that it might be more valuable for you to keep your cash
than to pay your quarterly taxes and never see that money again.
At least for the rest of the year. If that's the route that you decide to take,
and again I'm not advising you to do that,
I'm just saying think about it. Will it be more beneficial for you to do that
knowing that the penalty for not paying estimated taxes
is fairly small compared to other penalties, compared to other things
okay. Paying the penalties for not paying estimated taxes is relatively small.
So knowing that, given the situation that we're in, the pandemic or any other
crises that you might be in in the future, whether
it's family related, health related, whatever it is, you have
to just zoom out and see if this is the best option for
you okay. And so, if you do decide that maybe you
don't want to pay estimated taxes, maybe it's better to have that money
in your possession, what I recommend you doing
is setting that money aside in a savings account,
okay. A savings account is good because you at least earn a little bit of
interest you know like, there are some more
"high-yield" savings accounts out there that earn maybe like 1%
which is not bad, okay for a savings account, it's not bad.
So I recommend you putting it into a savings account
that's out of sight okay. I don't want you to spend it. I don't want you to, I
want it to be like your last resort in like an emergency
situation, okay. Because it's very important that
you pay your taxes that you owe. Because if you don't, the interest is
high, the penalty is high for not doing so. So instead of spending
the money, put it in a savings account that is out of sight, out of mind. That
you likely won't touch okay. That's there as security, as a safety
net. That's there for you in case something
really terrible happens. Now I don't recommend you putting it
into a brokerage account, or a stock trading account, or investing in
stocks unless you have like an enormous amount
of extra money. And I don't recommend that because your
timeline is short you know, it's it's at most a year because you're going
to be paying these taxes in at most a year. So a year's timeline
is too short to be taking that kind of risk in the stock market.
Because what if a year from now, in times of high uncertainty,
what if the stock market crashes when you owe your taxes?
Then you don't have anything to show for it and you're going to have to, and you know,
you wasted all the time, you saved your money but then the stock
market crashed so your money became less valuable, and now you owe these
taxes. So that puts you in a bad position.
Therefore, for this specific situation, I don't
recommend you putting it into a stock market or anything
that's more risky than like a savings account. But
again, I'll let you determine your level risk
and your level of risk tolerance and all that jazz in your situation.
I think that just gives another perspective on these things because
I definitely recommend to my clients that they pay estimated quarterly taxes.
However for this year, 2020, I've been asking them to consider
you know, would it be better for them to hang on to their money or not?
And I let them make that decision on their own because I don't want to advise
them to not pay taxes. That is not the right thing to do. I just
want them to consider all the details here. And so if you
choose not to pay estimated taxes, there are other things
you have to consider. Like if you are currently on an installment
agreement with the IRS, where you're making payments
for previous year's taxes. Then not paying estimated taxes may void
that payment plan. I mean, it's written in the agreement right there.
Now I have clients, many clients that don't pay their estimated taxes
every year. Every year they just tack on more
taxes onto their payment plan and nothing happens.
You know, they are still in their payment plan. They never made estimated taxes
and they are able to add their current years
tax liability to their previous year's payment plans.
And so in my own experience with my clients, I have not seen an
installment agreement be voided for not paying estimated taxes. That's
just my perspective and my experience okay. So that's another thing to consider
and just know that that's something that the IRS can do,
is void your installment agreement. Other than that,
I don't have anything else for now. Let me know what you guys think.
Let me know in the comments below do you plan on paying your estimated taxes, do
you plan on keeping your money, or have you paid estimated taxes before?
Are you trying to save your money to do that? Or have you gotten to this bad
habit of spending all of your income that you make
and not saving anything for estimated taxes? Let me know below
alright. Thanks for joining me. Please do smash that like button if you enjoyed the
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