Many business owners do a tax check in, usually between August and October. Despite the fact that this is actually late summer into early fall, you will often hear this referred to as a “mid-year” tax review. This effort can be an important one since it allows you to see where your tax liability is heading before the close of the year when many opportunities to affect your tax liability end. Additionally, conducting a review can help you to understand your tax liability since you are required by law to pay at least 90% of your actual taxes for the current year or 100% of last year’s taxes to avoid a penalty. A tax review before the end of the year can help you plan how much more you need to pay in estimated taxes to avoid paying even more in penalties.   

The review involves checking your revenue (the money you took in so far) and expenses this year against last year’s as well as the resulting profit (that is, revenue less your expenses). You'll also want to check how much you have paid in taxes so far. This process can be as in-depth as you choose, from just seeing if you are making more money to essentially preparing your own taxes.  

In this tool we share a process using a limited amount of information to gauge your taxes. We will then go through options you have in mitigating your tax bill before year’s end. 

Getting Started

Before you start your tax review, there are two activities you should undertake.  
First, you should review your previous year’s taxes. This will provide ideas for deductions and other strategies you can use this year. If you are a sole proprietor, the easiest way to assess your taxes is using this simple, free online app from the Wisconsin Early Childhood Association and Civitas Strategies. You can access it in English and ​​Spanish.  

Second, you will want to collect information on your revenue, expenses, and estimated tax payments. Specifically, you will want: 

• Revenue: All the revenue to date from any sources –subsidy, family payments, the Child and Adult Care Food Program, and more. This should include payments made in any form including cash, checks, cash apps (such as Venmo or Cash App). Include not only the revenue you have now, but also what you think you will receive by the end of the year. 

• Expenses: All your expenses to date for your business including payroll, rent, mortgage interest, utilities, supplies, and more. Home based providers should use their time-space calculation whenever applicable (to learn more see this tool).  

• Estimated taxes: If you are a sole proprietor, you are likely paying estimated taxes quarterly. If you have an S Corporation or LLC taxed as an S Corporation, your salary is W-2 income and should have tax withholding included in your payroll. However, your profit (the amount you pay yourself above your W-2 income) will require estimated taxes. We’ll share more on how you can determine if you are on track later in this tool, but for now, know that you can find your estimated taxes on the US Internal Revenue Service website.  

If you have a bookkeeping system such as QuickBooks or FreshBooks, likely you can get much of the information from a profit and loss report. If you don’t – no worries, you can review your bank accounts, credit cards, and other payment methods to collect the information.  

Reviewing your Information – Two Options  

Now that you have your information ready, there are two approaches to estimating your burden, one based just on your profit and the other using a calculator based on your overall family income and characteristics. We will run through both options below. 

Reviewing your Information – Profit Driven 

Of the two options, doing your review just based on profit is the fastest, but it also less accurate than basing it on your family income. You can likely run through this option in about fifteen to twenty minutes. 

Step 1: Determine your Profit 

Subtract your total expenses from your total revenue (remember this should include your actual and estimated amounts through the end of the year). The resulting number is your profit: 

For example, if Tonya’s information showed $105,000 in revenue and $67,000 in expenses her profit would be $38,000.

$105,000 (revenue) - $67,000 (expenses) = $38,000 (profit)

Step 2: Determine your Estimated Tax 

When sole proprietors have a profit they are required to pay both self-employment tax and then income tax. If you are an S Corporation owner (or an LLC that is treated as an S corporation) your W-2 income is an expense, so your profit is taxed as “regular income” (that is, there’s no self-employment tax). A good estimate for how much of your profit will be taxed is using a rate of 20%, if you don’t have a state income tax, or 25% if you do. Consider the following example: 

Tonya had $38,000 in profit and she lives in a state without income tax. In her case, she would want to estimate her profit using a rate of 20%.

$38,000 (profit) x .20 (estimated tax rate) = $7,600 (estimated taxes)

Using this rate, Tonya can assume $7,600 in estimated taxes by the end of the year. Next, Tonya can compare this amount against what she has already paid:  

Tonya had checked with the IRS site when she collected her data and saw that she had paid $6,000 in estimated taxes earlier in the year.

$7,600 (total estimated taxes) - $6,000 (taxes paid to date) = $1,600 (estimated taxes remaining)

Based on this information, Tonya should pay another $1,600 before December 31.  

In this case, Tonya had a positive number for her profit. But let’s say she didn’t and found that she will lose money by the end of the year. In this case, Tanya’s estimated tax would be zero. She will also want to look closely at her revenue and expenses to see if there was any way to cut costs or boost revenue.  

Step 3: Mitigate Taxes 

Before you write a check for additional estimated taxes, you will want to look at the section below on strategies for mitigating your taxes. As you use them, you could then adjust your numbers to better know what you should pay before the end of the year. 

Back to Tonya- let’s say she decided to put $5,000 of her profit into a SEP IRA (a business retirement account where you can deduct the cost from your business expenses): 

Tonya’s revenue is still estimated to be $105,000 but her expenses have now gone up to $72,000 (the original $67,000 plus the additional $5,000 for her SEP IRA):

$105,000 (revenue) - $72,000 (expenses) $33,000 (profit)

Since her profit is less, her estimated taxes will be less too:

$33,000 (profit) x .20 (estimated tax rate) $6,600 (estimated taxes)

Since she had already paid $6,000 in estimated taxes in this scenario, Tonya now only needs to pay $600 more now by the end of the year. 

Reviewing your Information – Family Income Driven 

Now, let’s say Tonya wants a more accurate number of her estimated tax bill. In this case she can use a family income driven approach. Though she will need some more data to use this method, she will also end up with a more precise number for her taxes based on household income and deductions.  

Step 1: Gather Additional Data 

In addition to the information you already collected, to use this approach you will also want to have any W-2 income information for you and/or your spouse, specifically your total annual pay and how much withholding has been taken out. You can do this by looking at your latest paycheck to see the “year to date” amounts. If you divide them by the number of months to date (to get an average monthly amount) and then multiplying that by 12 months to get an annual amount. Tonya’s spouse’s paycheck showed through the end of June she had earned $54,000 and had $12,000 in withheld taxes. In this case we divide both numbers by six (since it is the end of June) to get a monthly average of $9,000 for wages and $2,000 for withholding. We can then multiple the monthly averages by 12 to get an annual average: 

Monthly Wages: $54,000 (wages through June) ÷ 6 months = $9,000 of wages per month

Monthly Withheld Taxes: $12,000 (taxes through June) ÷ 6 months = $2,000 of withholding per month

Annual Wages: $9,000 x 12 months = $108,000

Annual Withheld Taxes: $2,000 x 12 months = $24,000

Additionally, you’ll want to have information on your children’s ages and educational status, your mortgage interest for the year, and your property taxes.  

Step 2: Calculate Your Estimated Taxes 

Calculating your estimated taxes using the family’s income and characteristics can be very time consuming by hand. However, there are many free online calculators you can use. In the ones we tested, the best choices were: 

• Get it Back; 

• H&R Block; and  

• TurboTax  

Unfortunately, they are not available in Spanish, but they can be used with your web browser translator.  

Here are the results from Get it Back for Tonya - she included her spouse’s income, hers, and information on their two children.