I always think it’s most helpful to provide instructions on how to do something like making estimated tax deposits and then back up the instructions with a clear example. It’s pretty easy to figure an estimated tax deposit if you have all your revenue and expense amounts in front of you and you know what to do with them.
You might think since I’m a CPA I have an elaborate accounting system for my craft business. Like the cobbler whose children go shoeless, I keep extremely simple accounting records for my own business. If you also keep your books in a more manual system, check out the simple example below for some hints on how to do-it-yourself.
Figure Your Gross Receipts
My merchant account is tied to my PayPal account so all I have to do is run a PayPal report for the depositing period. To that, I add all customer invoices paid by cash or check. If you have a dedicated business checking account and all deposits to the checking account are business related (and all revenue is deposited to the account), you can also use deposits to bank statements.
Add Up All Your Expenses
I keep all my craft business vendor invoices filed by vendor. At the end of each month, I total all the invoices for the month, write the total on the front of the vendor folder and attach the adding machine tape to the inside of the folder. It’s simple work at the end of the quarter to quickly add all monthly vendor totals to come up with my total expenses.Wondering what to do about your other expenses that aren’t tied to vendor invoices like depreciation and interest expense? Without knowing the exact circumstances, my suggestion is to come up with your best estimate on the dollar amount of these types of expenses. Your lender will give you a statement at year-end with the exact amount of interest you paid. Depreciation is a more complicated accounting subject. If you can’t figure it yourself, get a tax professional to help you.
Calculate Your Estimated Tax Deposit Amount
Let’s say I’m preparing my September 15 estimated tax deposit. Gross receipts for June, July and August are $10,000. I totaled all my expense for the same period and they come to $4,500. My net income is $5,500. ($10,000 - $4,500).
How much is my September 15 estimate tax deposit? A good ballpark to use for the tax percentage is 30%. The 30% includes the 15.3% self-employment tax and assumes you are in the 15% tax bracket. However, I know my federal income average tax rate last year was 18% and I expect this year to be pretty much the same. So, I’m upping the 30% to 33% (15.3% self-employment + 18% federal income tax).
Finishing up this exercise, my estimated tax deposit is $1,815 ($5,500 X .33).
If your business financial statements are regularly prepared by a bookkeeper or CPA, calculating the 1040-ES deposit when needed is part of their job. If you use a boxed accounting software product like QuickBooks, you can run an income statement to come up with net income. Make sure you convert to cash if you keep your books on the accrual method. Use your QuickBooks net income figure to calculate your estimated tax deposit using these same instructions in the section above.
