Estimated Taxes and Monarch Butterflies
In this edition of the Flying Point Update we're going to talk about estimated tax payments, a W2 withholdings planning tip, and monarch butterflies. This will be a little tax-heavy, but I think it’s good information to be aware of.
Top of Mind
Yesterday was the Q3 estimated tax payment deadline, which means my phone has been ringing with the usual mix of "did I miss it?" and "wait, what are estimated taxes again?" questions. It's one of those aspects of our tax system that catches people off guard, especially when they transition from W-2 employment to self-employment or start earning significant investment income.
The whole concept of estimated taxes stems from the fact that our tax system operates on a "pay as you go" basis. The IRS doesn't want to wait until April 15th to collect taxes on the income you earned throughout the year. Put simply, they don't want to give you an interest free loan any more than you want to give one to them. For most people with traditional jobs, this happens automatically through payroll withholding. But when you have income that doesn't come with built-in withholding - like business profits, rental income, or investment gains - you're expected to make quarterly payments instead.
This creates an interesting psychological challenge. When taxes are automatically withheld from your paycheck, you barely notice them. But when you have to write a check to the IRS four times per year, it feels much more painful, even though the total amount might be identical. It's the same reason why European countries often include sales tax in their posted prices - what you don't see hurts less.
The challenge for business owners is that estimated taxes require you to predict your income months in advance. You're essentially making your best guess in January about what you'll owe in taxes for the entire year, then sending payments throughout the year based on that guess. Life rarely cooperates with our financial projections, which is why the IRS created safe harbor rules to give taxpayers some breathing room when their estimates prove wrong. I'll spare you a lengthy explanation of tax calculations, but safe harbor rules play a major part when we include estimated tax vouchers with a tax return. They're not just random numbers.
Worth Knowing
Here's something that can save you significant penalty headaches: W-2 withholdings are treated as if they were made evenly throughout the year, even if they actually weren't. This creates a powerful planning opportunity that many people don't know about.
Let's say you missed your Q1 and Q2 estimated payments because business was slower than expected, but then had a great Q3 and realized you're going to owe significant taxes. Rather than trying to catch up with a massive Q4 estimated payment, you might be better off increasing W-2 withholding if you or your spouse receives regular paychecks. This can be particularly helpful for s-corp owners who have both W-2 income and shareholder distributions.
For example, if you need to make up $8,000 in missed estimated payments and your spouse gets paid bi-weekly through December, you could increase their withholding by about $400 per paycheck. From the IRS's perspective, this extra withholding will be treated as if it was paid evenly throughout the year, effectively covering your missed quarterly payments without any underpayment penalties.
This strategy is particularly useful for business owners whose income is lumpy or unpredictable. Rather than guessing at quarterly estimated payments, some find it easier to be conservative with estimates and then true up with increased W-2 withholding in Q4 once they have a clearer picture of their annual income.
The key is understanding the safe harbor thresholds: if you pay at least 100% of last year's total tax (or 110% if your prior year adjusted gross income exceeded $150,000), you'll avoid underpayment penalties regardless of how much you actually owe this year. This gives you a predictable baseline to work from.
Mark Your Calendar
October 15th: Final deadline for individual returns with extensions - just one month away now
January 15th: Q4 estimated tax payments due (yes, even though it's technically for Q4 of 2025, the payment isn't due until January 2026)
Now is also an excellent time to start year-end tax planning conversations, especially with all the recent tax law changes and the knowledge of what your 2025 income is likely to look like.
Maine Wildlife Facts
Our garden is full of late summer blooms, which means we've been seeing plenty of monarch butterflies. Inspired in part by a library favorite, Velma Gratch and the Way Cool Butterfly, Will and Frank have been fascinated watching them prepare for their incredible 3,000-mile migration to central Mexico.
What's remarkable is that these monarchs have never been to Mexico before - they're following a route programmed into their genes by ancestors they've never met. Unlike the spring migration north, which takes multiple generations, the fall journey is completed by a single "super generation" that lives 6-8 times longer than summer monarchs.
They navigate using the sun's position and their internal circadian clock, essentially functioning as living compasses. The timing of their departure is remarkably consistent - most Maine monarchs begin their southern journey in mid to late September. Unlike our estimated tax deadlines, the monarchs never seem to miss their migration schedule!
These Maine wildlife facts have been brought to you by Will (7) and Frank (3), Flying Point Advisors' on-staff naturalists.
Questions about any of this? Just reach out - I read every email and love hearing from you. Thanks for reading. You'll hear from me again in about two weeks.
-Mike