Dear Liz: I recently retired and started my own consulting business, which is doing very well. My question is on taxes. I have been told that I must pay quarterly taxes, but I have no idea if I will make $10 this month or $10,000. How do I estimate my income if I have no idea? Can I just wait till the end of the year and figure it out then?
Answer: You don’t want to do that. If you owe a significant amount at the end of the year, you’ll owe a substantial penalty on top of your tax bill.
The good news: The IRS requires you to figure your estimated quarterly taxes, not your “guesstimated” taxes. You’ll make the calculations based on what you actually earned that quarter, not what you expect to earn in the upcoming quarter.
Tax software programs such as TurboTax and TaxAct can help you make the calculations, but you’d be smart to hire a tax pro with experience advising small-business owners. The pro will have ideas about how to minimize and manage your tax bill. He or she also will be available to answer the many questions you’ll have about taxes, incorporation and other matters as your business grows. If you should be audited, a tax professional such as an enrolled agent or a certified public accountant would be able to represent you. (Even the most avid do-it-yourselfer should understand that representing yourself in an audit is not a good idea.)