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Mistakes new business owners make - Part II

The second most common mistake new business owners make

Starting a new business is a big deal and there are a lot of moving parts to manage. And if you've never started a business before, you don't know what you don't know. So, this the second in a two part post about the major mistakes I see new business owners making.

The number two mistake I see new business owners make is: not planning for or paying estimated taxes.

Most self-employed folks know they’re supposed to make quarterly estimated tax payments. And yet… so many of them still don’t.

When you’re running a business, managing all the things, and wearing ten different hats, quarterly taxes are easy to push aside. But ignoring them can create some frustrating and expensive consequences when tax season rolls around.

What happens when quarterly taxes aren’t paid? When taxes aren’t paid throughout the year, two things typically happen:

A much bigger tax bill at filing time - Instead of spreading payments across the year, everything comes due at once in April. Cash flow is already tight in self-employed gigs, so having to pay a large lump once a year is much more painful than paying as you go.

IRS underpayment penalties - The IRS expects taxes to be paid as income is earned. If not enough tax is paid during the year, they can assess underpayment penalties and interest, even if you pay the full amount when you file your return.

How much should you pay each quarter? The amount you should be paying each quarter depends on your specific situation. But if you don’t want to bother with calculations, one easy way to avoid penalties is to pay 100% of your total tax from the previous year in four equal installments (110% if your AGI was more than $150,000 (MFJ) or $75,000 (S). For example, look at line 24 on your 2025 tax return “Total tax”. Take that number and divide that by 4. The result is your quarterly federal tax payment, and if you pay by that due date each quarter in 2026, you will not be assessed any penalties. But you MUST pay EACH QUARTER by the deadline: April 15, June 15, September 15 and January 15).

Plan ahead and avoid penalties and interest AND the large lump sum payment due - One of the best ways to make sure you have the funds to pay quarterly estimated taxes is to take 25% of every incoming dollar and set it aside for tax payments. So every time a client makes a purchase or pays an invoice, immediatlely transfer 25% and hold it until the quarterly payment is due.

If you'd like help figuring out how much you should be paying each quarter or setting up a simple system to avoid large lump sum payouts and penalties and interest, get in touch.

This information is provided to assist in understanding information relevant to the determination of whether an activity may be treated as a for-profit business for federal tax purposes. Conforming with the information provided does not guarantee that the Internal Revenue Service (IRS) will agree with the classification of the activity as a business.

Final determination is based on all facts and circumstances, and the IRS may reach a different conclusion upon examination. The taxpayer remains responsible for the accuracy and completeness of all information provided and for maintaining adequate records to support their position.