Mistakes and Cures for Pharmacy
Estimated Tax Payments
Estimated tax payments are required by pharmacies on a quarterly basis. Underpayment of this expense can result in penalties and interests. However, overpayment isn’t ideal either. In this video, Scotty Sykes, CPA, CFP® of Sykes & Company, P.A. shares a few ways you can manage estimated tax payments in your independent pharmacy. He discusses:
- What an estimated tax payment is;
- Mistakes commonly seen with estimated tax payments, such as overpayment on a quarterly basis;
- What is involved in the pharmacy tax planning process to ensure that pharmacies aren’t overpaying their tax payments; and
- Why getting a tax refund for overpayment isn’t a good thing.
If you prefer to read this content, the video transcript is below.
What are estimated tax payments?
Estimated tax payments are taxes that the IRS requires the taxpayer to pay throughout the year. For those entities that are pass-through type entities for taxation including the S-corporation, partnerships, schedule Cs. The IRS says you got to pay in your taxes throughout the year, not just on April 15th. So that’s what an estimated tax payment is, is paying that tax throughout the year periodically so you can become in compliance with the laws. Failure to do so may result in underpayment penalties.
What mistakes do you see with estimated tax payments by pharmacists?
Mistakes we commonly see with pharmacies with estimated taxes is, some of them don’t pay the estimates at all and then they’re stuck with a large bill on April 15th. Plus, an underpayment penalty and interest. That’s a common mistake. Another mistake we routinely see is those estimated taxes are not properly estimated. Your CPA should handle that. And that they’re not reviewed quarterly, so you have four payments to make a year, according to the IRS. You can make them anytime you want, the IRS will take your money anytime, but there’s four due dates: April, June 15th, September 15th, and January 15th of the following year. So what we routinely see is that pharmacies either aren’t paying enough or they’re paying every quarter when they don’t need to be. So if you’re paying an extra quarter or two of estimated taxes, say $15,000, $20,000, $50,000, that’s money, that’s cash flow in your pharmacy that you’re probably taking out of your pharmacy that could be staying in the bank account and improving your ratios and improving your cash flow when it’s not necessary. You have to routinely check those estimates each quarter.
What is involved in the tax planning process?
When you’re faced with estimated taxes, and you want to be proactive on that front, tax planning is a key metric you need to be doing each year. And the tax planning’s gonna identify how your original estimates were setup, whether they’re still accurate, whether they need to be adjusted. Because, again, this is all coming down to the cash flow in the pharmacy and you need to be staying on top of this because there’s no point in paying $50,000 a quarter to the IRS if it’s not necessary. That also goes for the state’s as well. This applies to the state’s. So tax planning is going to be your gateway to overviewing how you’ve done throughout the year, of course you got to have those sound fundamentals in place with numbers each and every month so you can proactively plan accordingly for the year, but in about the 3rd or 4th quarter you’re looking at tax plan projections, what your tax liability is going to be. Also, adding in your strategies you may be considering with your CPA to mitigate that tax and then you can adjust those 3rd and 4th quarter tax estimates accordingly whether you need to pay less, whether you don’t need to pay them at all. So tax planning is a very key part of that process and it’s all going to come down to those fundamental numbers. Hopefully you have that in place, it’s going to be required. And then, once you’ve got that, you’re going to see your cash flow hopefully improve because you’re staying on top of it, plus you’re mitigating the tax during the tax planning process.
What is wrong with getting a tax refund for overpayment?
You know, tax refund on the grand scheme of things, is great on April 15th, however, you do need to be mindful that that is an interest free loan you’re giving to the government and that’s money that you’re lending, but you’re not getting anything in return so the overall goal is to break even and that’s really where tax planning’s going come into play so you’re not giving out any more money than you absolutely have to. Be mindful of that when you’re thinking of refunds. The goal is not just a large refund, it’s about managing this process so you about break even. That’s what you’re shooting for. And, again, I just want to mention that cash flow is a very key concern in pharmacies and a lot of folks don’t consider estimated tax payments as a part of that process, which is the government is your silent partner so when you are doing any kind of cash flow planning for your pharmacy, you have to be aware that the government is a partner there. They’re going to be requiring taxes to be paid so you do have to incorporate that into your cash flow model and, of course, Sykes & Company can help you do that by staying on top of your numbers, getting the fundamentals in place, and, of course, proactive tax planning throughout the year. Feel free to reach out to us at any time, we’ll be happy to help you.