Tax Planning: What does that entail?

One of the key areas we focus on with our clients is understanding, planning, and preparing for taxes. We don’t want any businesses to come to the end of the year and have a large tax bill to pay. Our best-case scenario is to review your books on a monthly or quarterly basis and help you determine how to minimize your tax liability. Additionally, we want to ensure that you are paying the appropriate estimated taxes throughout the year, so you are not hit with a large bill and penalties at the end of the year.

Please refer to this IRS guide for Estimated Taxes:

The most common version of tax planning involves reviewing your tax payments from the previous year and estimating the same amount for this year as taxes. This is the easiest way to do it. If you expect your income to remain the same, you are not anticipating a raise, you are not selling property or stocks, then this approach will generally work for you. It depends on your income and expenses remaining the same year after year.

For most people, especially business owners, this is simply not the case. Businesses generally do not perform the same year after year, because the market is not the same year after year. For example, we saw businesses growing during 2021 and 2022, but we have not seen the same rate of growth in 2024 and 2025.

For tax planning, it is better and more accurate to look at what is happening this current year and what you expect the rest of the year to look like.

Let’s assume we will not have everything the same as last year. To plan for estimated tax payments, we will still need to review the previous year’s tax information to use as a baseline. Then we want to look at this year’s:

W-2s and pay stubs (are we making more or less than last year)

Any rental properties that are running a profit or loss

The sale of stocks or bonds that netted a gain or loss

Next, we look at estimating the business income and expenses for this year. Please note that in order to do this as accurately as possible:

The previous year’s tax return must have been completed and filed.

All bank accounts must be reconciled up to the time we are making this estimation.

The Balance Sheet must be current as of the time we are doing this estimation.

The more accurate our books are as of the time of tax planning, the more accurate our tax plan will be     

The next step is to compare our current position with where we were at this time last year. Do we appear to have higher or lower net profits this year? Do we expect this trend to continue throughout the year? We will need to figure out, to the best of our ability, what the end-of-year profit will look like.

Consider your usual high (busy) and low (slow) seasons.

Consider potential pricing changes for your inventory and materials.

Consider any raises you may give to employees during the year, and any end-of-the-year bonuses you have planned.

We will not only review your books, but we will also discuss with you what you may have planned to accomplish before the end of the year, such as acquiring new office space, purchasing equipment, or vehicles.

As we progress through the year, we can refine our expectations for the end-of-year based on how Q1, Q2, and even Q3 have performed. This will enable us to make a more accurate estimate of your overall tax liability for the entire year.

Once we have determined the estimated tax amount, we can then break it down into four quarterly payments throughout the year, rather than making one large payment at the end of the year. Remember:

If we pay more taxes than we actually owe, we receive a refund; however, our cash is tied up with the IRS, and we do not earn any interest on those funds.

If we pay less in taxes than we actually owe, we could face a large tax bill in April, along with possible penalties and interest.

As we have previously talked about,

Please refer to our previous “Why do we pay (Estimated) taxes” video:

We will release another video in a few weeks, discussing various ways to save money on taxes overall.

We encourage you to like and subscribe to our channel, and turn on notifications, so you can stay updated when this video is released in two weeks. Additionally, please share this content with anyone else who may benefit from it.

Here at Waterford Business Solutions, we work closely with our clients to ensure their books are accurate and up to date. We work with them to ensure they are prepared for tax season each month, and we conduct quarterly tax planning with many of our clients.

If you are in the trades, such as HVAC, plumbing, electrical, or general contracting, and you need help with understanding your books and tax planning, please reach out to us. Send an email to info@waterfordbusiness.com or call 864-351-0852. And don’t forget to subscribe to our channel and turn on notifications for future accounting and tax planning videos. We post a video every Monday featuring accounting tips and addressing common issues.