If you’re like many small business owners, you’ve learned the perils of not making your estimated tax payments throughout the year. This lesson generally comes in the form of a huge tax due bill at the end of your first profitable year. “Yikes!! I owe how much??”
To make Uncle Sam happy, you’ve started to make estimated tax payments. But how do you keep track of these payments, especially if you’re making them out of business funds? If you’re operating as a sole proprietor, partnership, or Sub-S corporation, your personal estimated tax payments are NOT deductible business expenses. So how do you record them?? Create a new “equity-type” account in your Chart of Accounts (Ctrl+A in QuickBooks, then Ctrl=N to create the new account).
By creating this account as an equity-type account, several things are happening:
- Your tax payments are not going to show up as expenses on your Profit-&-Loss statement. If they did, they would artificially reduce your net profit — making you think you had made less money than you really have, and making you underestimate your taxable profit!
- Your tax payments are going to show up as reductions in your equity on your balance sheet. These payments represent withdrawals of your equity in the business. By putting them as a separate line item in QuickBooks, you’ll make it easy to report your tax payments when it’s time to start pulling together your tax return.
There. You’ve properly accounted for your tax payments, you’ve made Uncle Sam happy, and tax preparation will be a breeze next April. Isn’t accounting fun?!?