Why a Mid Year Review Matters:
For many business owners that take paychecks, withholding is not enough to cover estimated taxes that come with business profits. For sole proprietors, this is especially true. As a result it is important to review your projected income and think about tax planning throughout the year.
The IRS requires taxes to be paid as income is earned, either through withholding or estimated tax payments. If you expect to owe at least $1,000 in taxes for 2025 after subtracting withholding and credits, or if your withholding and credits will be less than 90% of your 2025 tax or 100% of your 2024 tax (110% for some higher income taxpayers), you must make estimated tax payments to avoid or minimize late payment penalties and interest. These payments are due starting a year before the returns are due; in other words the first estimated payment for 2025 tax returns was due April 15, 2025.
Action Steps:
Up-to-Date Bookkeeping
Make sure your bookkeeping is up-to-date and accurate. Without good numbers, you can’t do effective tax planning.
Review Year-to-Date Income and Expenses:
Compare your actual results to your projections. If your business is performing better or worse than expected, adjust your income projections for the rest of the year. Also, consider your business income for 2026, as this plays a large part in effective tax planning.
Update Estimated Tax Payments:
The second quarterly payments are due June 15th, 2025, followed by the third quarterly payment due September 16, 2025, and the fourth payment due January 15, 2026. Making timely and accurate payments helps avoid underpayment penalties. Set aside funds regularly for estimated tax payments to avoid cash flow surprises.
- Review Entity Structure: Consider whether your current business structure (e.g., sole proprietorship, partnership, S corporation, C corporation) is still optimal for your tax situation.
- Retirement Plan Contributions: Evaluate opportunities to contribute to retirement plans for owners and employees, which can reduce taxable income. If you don’t have a retirement plan, consider this soon as deadlines to implement plans can be as early as October 1st, depending on the type of plan you implement.
- Timing of Large Purchases: Large purchases such as fixed assets or business vehicles can yield large write-offs in the year of purchase. However, whether to pull the trigger in 2025 or 2026 depends on when you will be in a higher tax bracket.
- Monitor Tax Law Changes: Stay informed about recent or pending tax law changes that may affect your business, such as changes to depreciation, credits, or deduction limits. We will let you know of changes once they become law.
Staying on top of your finances is crucial to keeping taxes low and improving your wealth and financial picture. But it should happen throughout the year, not just at year end. By understanding your opportunities and obligations, keeping accurate records, and planning ahead, you can avoid penalties and make the most of available tax benefits.
Contact us for more information about our services.
Flatiron Advisors is a virtual tax and accounting firm offering proactive tax planning strategies for business owners, rental real estate owners, and employees receiving equity-based compensation. We offer holistic, fee-based financial planning and investment management services through Flatiron Wealth Advisors, LLC.
