There’s no doubt, owning and managing a dental practice comes with a list of challenges, and tax obligations are an important aspect that requires your careful consideration. Unlike traditional employees, practice owners don’t benefit from automatic tax withholdings, making estimated taxes a crucial element in financial planning. In this post, I’ll dive into the topic of paying estimated taxes, exploring who in the dental field needs to pay them, the reasons making these payments (on time 😊) are critical, and specific considerations for dental practice owners.

Who Needs to Pay Estimated Taxes in the Dental Field?

Why are Estimated Taxes Crucial for Dental Practice Owners?
As the head of a dental practice, you fall into the category of business owners who must pay estimated taxes. The income generated from your practice doesn’t come with the luxury of automatic withholding. This requires proactive tax planning and quarterly payments to the IRS. The IRS expects you to do the same thing an employer would: periodically (every three months) make a payment that approximates what you would owe for that quarter. Then, like everyone else, you’ll include that information when you prepare your income taxes, at which time you’ll either get a refund or have to pay in.

Self-Employed Dentists:
If you operate as a self-employed dentist, (running a solo practice or as a freelancer, for example) estimated taxes are required. Unless you have an employer who is handling tax withholdings throughout the year, it’s your responsibility to calculate and send quarterly payments to avoid penalties.

Additional Income Streams:
Practice owners often have diverse income streams, such as income from investments, rental properties, or consulting work. All these sources contribute to your overall tax liability and require careful consideration when determining estimated tax payments.

Why are Estimated Taxes Crucial for Dental Practice Owners?

Cash Flow Management:
It’s not uncommon for dental practices to experience fluctuations in cash flow. Paying estimated taxes allows you to manage your cash flow more efficiently by spreading your tax obligations throughout the year rather than facing a substantial lump sum at tax season. Imagine preparing your taxes in April having not paid in anything through the 12-month tax period. Chances are, you may be filing for an extension (which doesn’t get you off the hook for paying by the April deadline: You’re still expected to submit an estimate of the tax due).

Avoiding Penalties:
The IRS imposes penalties for underpayment of taxes, and dental practice owners are not exempt. The IRS imposes underpayment penalties if the total tax paid throughout the year is less than either 90% of the current year’s liability or 100% of the previous year’s liability (110% if the taxpayer’s adjusted gross income exceeds $150,000). These penalties can accumulate quarterly and may lead to financial consequences for individuals and businesses who do not fulfill their estimated tax obligations.

By paying estimated taxes on time (and accurately), you can steer clear of penalties and interest charges.

Unforeseen or Unpredictable Expenses:
Running a dental practice often presents unpredictable expenses, from equipment and technology upgrades to unexpected repairs. Paying estimated taxes will ensure that you set aside funds for your tax obligations, preventing financial strain when these unforeseen expenses arise.

Key Considerations for Dental Practice Owners Paying Estimated Taxes:

Warning: We’ll tell you up front: Calculating estimated taxes is difficult, and the IRS rules and exceptions are complex. If you’ve never gone through this process before, or if your financial situation is changing, we recommend you gather up your income and expenses, and let the STAC Bizness team help you with this. You can contact us here.

Claiming Legitimate Business Deductions:
Dental practice owners are entitled to certain business deductions that can significantly reduce their taxable income. Considering deductions for office and clinical equipment purchases, office supplies, and even professional development should be considered when calculating estimated taxes.

Employment Taxes:
Beyond income taxes, dental practice owners are responsible for employment taxes, including Social Security and Medicare taxes for employees. Calculating these obligations accurately is crucial when determining overall tax liability.

Investment Income:
Many practice owners invest in additional income streams, such as stocks or real estate. Keep in mind, the income generated from these investments contributes to your overall tax liability and should be factored into estimated tax calculations.

Solid Recordkeeping:
Thorough and accurate recordkeeping is essential for dental practice owners. Detailed records of income, expenses, and tax payments not only facilitate accurate estimated tax calculations but also serve as a valuable resource in case of audits or inquiries.

Unfortunately, there’s no magic formula for calculating the estimated taxes you should pay every quarter. That’s why they call them “estimated.” And changes to the tax code aren’t finalized by Congress until the end of the year, by which time you should have made three payments (April, June, and September; then your final quarterly payment is due January).

You can use the worksheet that the IRS supplies (you’ll find payment vouchers here, too). If you’re using accounting software or a website, it’ll be much easier to assemble the numbers. (And if you’re still doing your accounting manually, we can help get you set up with a solution that works for you.) If your financial situation hasn’t changed much since the previous year, you could use your most recent return as a model.

Wrapping this all up…

For dental practice owners, knowing and following appropriate guidelines when it comes to estimated taxes is a critical component of successful financial management. Engaging with a professional team like STAC Bizness Solutions who specializes in the dental industry, and staying informed about fluctuating income and expenses ensures that your practice not only meets its financial obligations but also avoids unnecessary headaches and penalties. Remember, proactive planning today can help alleviate stress down the road!

Looking for an expert?  We can help! Whether you are just starting a new practice or looking to maximize value in advance of a sale, we’re here to guide you through the financial implications at every stage. We’ll act as your trusted and focused partner to ensure that you have a rock-solid plan to keep your practice on track. You can learn more about us at https://www.stacbiz.com/ or by calling us at 844-424-9637

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