Why Every Dentist Needs to Understand Quarterly Tax Estimates

Casey and Jarrod are joined by Kevin Rhoton, CPA and MBA, who brings his wealth of knowledge in accounting and tax planning to the table.

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.

Casey Hiers:
Hello and welcome, and this is Casey Hiers back at the Millionaire Dentist Podcast, in studio with cohost Jarrod Bridgeman.

Jarrod Bridgeman:
Ahoy hoy! How's it going Kevin? Kevin. Let's start that again.
Ahoy hoy, Casey.

Casey Hiers:
This is Casey.

Jarrod Bridgeman:
Whew, right. Kevin's also here.

Kevin Rhoton:
Hello.

Casey Hiers:
Jarrod is on point. Yes, our guest today, Kevin Rhoton, MBA, CPA. When we bring Kevin in, it's typically for what topic?

Jarrod Bridgeman:
Taxes, usually.

Casey Hiers:
Taxes.

Kevin Rhoton:
Yeah.

Casey Hiers:
Here's the Cliff Notes, you got to pay them.

Jarrod Bridgeman:
Kevin or the taxes?

Casey Hiers:
He takes, you know.

Jarrod Bridgeman:
He'll take some.

Casey Hiers:
But yeah, got to pay taxes. Podcast over.

Kevin Rhoton:
Yeah. Thanks for listening.

Casey Hiers:
Kevin, what do you want to talk about today, man?

Kevin Rhoton:
Yeah. I wanted to go a little bit more into the estimates.

Jarrod Bridgeman:
Just estimates, are we talking quarterly tax estimates?

Casey Hiers:
Quarterly estimates?

Kevin Rhoton:
Quarterly tax estimates.

Jarrod Bridgeman:
Perfect.

Casey Hiers:
I'm learning. I'm learning from you.

Kevin Rhoton:
When you're a W2 employee, you have withholdings. A lot of times, those withholdings take care of any tax obligations that you might have.

Casey Hiers:
Like escrow in your mortgage.

Kevin Rhoton:
Yeah.

Casey Hiers:
That just came to me.

Kevin Rhoton:
Sure.

Casey Hiers:
It's brilliant.

Jarrod Bridgeman:
Sorry.

Kevin Rhoton:
When doctors get into practice ownership, there comes that practice income, that S corp income aspect to it where there's no withholding, there's no reporting W2.

Casey Hiers:
The mind shift have to change, now you're the owner.

Kevin Rhoton:
Yes. Yeah, there's a huge different between being an employee and being the owner. A lot of times, practice owners, for many different reasons, don't quite understand the quarterly tax projections, the quarterly tax estimates that have to be done to really fine-tune and make sure that you're paying the correct amount of taxes. Not overpaying, not underpaying. So many times, with practice owners coming in, going through the consultation process, if they're new practice owners not having experience at the ownership level, the ownership aspect of a practice-

Casey Hiers:
Some entity structures make it so you don't pay quarterlies. Is that correct or is that incorrect?

Kevin Rhoton:
That's incorrect.

Casey Hiers:
Okay, good. See, I'm making you look smart. Some people aren't paying quarterlies.

Kevin Rhoton:
Because they don't need to.

Casey Hiers:
Oh. Not just because of lazy accounting?

Kevin Rhoton:
It is possible that every person ... It is an individual tax aspect. You could have to pay quarterlies if say your non-earned income that you're not paying W2 withholding on is high enough.

Casey Hiers:
Got it. Okay. We've talked about this before. Unfortunately, too many practice owners out there settle for last year's performance divided by four, there's your quarterlies. That's the 101 level, we're passed that a little bit. But that feeling of paying quarterlies can make you, I was going to say pucker, but we'll say nervous because of cashflow.

Kevin Rhoton:
Yeah.

Casey Hiers:
Four times a year, you're paying a pretty decent chunk of money.

Jarrod Bridgeman:
Right.

Casey Hiers:
The cashflow stress is real, you've seen that.

Kevin Rhoton:
Yeah. Maybe just to back up a little bit-

Casey Hiers:
Yes.

Kevin Rhoton:
Where you were hitting on is the IRS, they say as long as you pay in 90% of your tax for the current year or 100% of prior year's taxes, you won't owe a tax penalty. A lot of times, practice owners are coming to us where their prior tax preparer just, what I call canned tax estimates were, "Okay, this is what your tax liability was last year. Just make sure you get this paid in and you're fine." Okay, they do that but oh-

Jarrod Bridgeman:
You're fine on at least the penalty part.

Kevin Rhoton:
On the penalty.

Casey Hiers:
The keyword is fine.

Kevin Rhoton:
Yes.

Casey Hiers:
The Internal Revenue Service, they're so nice, they don't make you pay penalties.

Kevin Rhoton:
Right.

Casey Hiers:
Gotcha.

Kevin Rhoton:
But you still owe taxes. What if your income went up 20%? Or 200, 300,000, which we've seen when they come to us. "Hey, my practice grew. I have a $150,000 tax surprise." Their prior accountant didn't do the quarterly adjustments that we look at.

Casey Hiers:
Then probably, extended it and then it was late.

Kevin Rhoton:
Extended it, yes.

Casey Hiers:
Yes, yeah. When are quarterlies due?

Kevin Rhoton:
Quarterlies are due ... It's interesting because the IRS in all their wisdom don't have quarterlies on a quarterly basis.

Jarrod Bridgeman:
Oh.

Kevin Rhoton:
The first quarterly is due April 15th.

Jarrod Bridgeman:
On tax day.

Kevin Rhoton:
Tax day, yeah. You would think okay, then the next one would be July 15th, the first-

Jarrod Bridgeman:
The first three months later, yeah.

Kevin Rhoton:
Three months later. No, the next one's June 15th.

Jarrod Bridgeman:
Oh, yeah. Yeah.

Kevin Rhoton:
Just two months later.

Jarrod Bridgeman:
Okay.

Kevin Rhoton:
Then you go to September 15th, and then you go all the way to January 15th for the fourth quarter. So they're a little bit off, but regardless.

Jarrod Bridgeman:
It's that new math.

Kevin Rhoton:
Yeah.

Casey Hiers:
I like asking questions I already knew the answer to, but that was good to hear.

Kevin Rhoton:
Yeah.

Jarrod Bridgeman:
I didn't know any of that.

Kevin Rhoton:
Yeah. The schedule is a little bit off. But again, what we try to educate our clients on, our practice owners, is our estimate process. Our projection processes, we don't just do the, "Okay, as long as you've paid in what you owed last year, then you're fine." We go through a very long process. We of course look at your practice year-to-date income, which by us doing the monthly financial statements, a lot of practice owners, they don't get monthly financial statements. They don't have an accountant keeping up with their profit and loss year-to-date. We're able to take that, we're able to take any outside income from spouse, maybe a spouse has an outside W2. We look at their investments, year-to-date activity. We have actually quite a few that have rentals. There's all kinds of different aspects to your income.

Casey Hiers:
Practice owners love real estate.

Kevin Rhoton:
Yeah. Yeah, they do. We take that into account when we look at their quarterly estimates. It's not just well, what was my W2 income this year? Okay, good to go.

Casey Hiers:
With that comprehensive view and with adjusting it throughout the year, which is the right way to do it. That's surgical, that's varsity, that's pro or however else you want to describe it. That's the way to do it. What are some unintended consequences or challenges that come with this sometimes, if you put in a new structure for practice owners that maybe they're not used to or that's hard for them?

Kevin Rhoton:
The estimates will be adjusted, will go up and down. They might be used to, "Okay, I pay $25,000 every quarter for estimates and that's all I do."

Casey Hiers:
Then they get smoked on the back end with a tax surprise.

Kevin Rhoton:
Yes.

Casey Hiers:
Now, if it goes from 25,000 to 36,000, they feel that cashflow stress in the year.

Kevin Rhoton:
A little bit, yeah.

Jarrod Bridgeman:
That kind of reminds me of ... This is probably a really poor connection here. But when I was in college, I remember signing up for, our electric company had a budget program where you just paid $70 a month, no matter what, and at the end of the year you made up the difference. When all of a sudden it hit and it turned out we used the air conditioning a lot more than the last tenants did.

Kevin Rhoton:
Yeah.

Casey Hiers:
That's the worst college story you've ever told me. Your college stories are usually pretty good, all fair. That was just-

Jarrod Bridgeman:
I'm sorry.

Casey Hiers:
That was cute.

Jarrod Bridgeman:
Yeah, and then I had a beer. That help? But yeah, it's actually similar to that where at the end of year, if you've underpaid, it might have been more you had to cover up.

Casey Hiers:
Well, it's easy. It's easy to do that.

Kevin Rhoton:
Yeah. When your estimates go up, it's because your income has gone up. Now a lot of times, the practice owner might now feel that because that's not exactly what they're pulling out of the practice. Their W2 is probably set at some amount. Well, your practice income went up and while you don't realize that with money in your pocket right away, it's probably sitting in the practice bank account. You can take a distribution for that. Our ideal is you only pay as much in taxes as you need to. No more, no less. For that quarter, if your taxable income for those few months that we looked at is up quite a bit, then we adjust your quarterly that much. You might have a piece of equipment, your x-ray machine or something go down, or a CEREC goes out or is going out and you need to purchase another one. Well, we can take Section 179 on that, that lowers your tax liability, then that will lower your quarterly that time.

Casey Hiers:
A lot of times, practice owners will look through a singular lens, well this is humans, look through one lens, a singular lens, and just look at the one thing. This could be frustrating if it shoots up and down, but in reality, if you're looking at the comprehensive picture, it is the most effective, the most efficient, and most beneficial way for the practice owner, right?

Kevin Rhoton:
Right.

Casey Hiers:
Is to have custom, live-time quarterlies so that there's planning and consistency, versus playing catch up, rearview mirror, historical, historian, and all that.

Kevin Rhoton:
Yeah.

Casey Hiers:
Okay.

Kevin Rhoton:
Yeah. On the back end of that is we help our clients with preparing for those taxes. Whether it's through savings, we'll pull some money over into brokerage. It's not like here, just go spend all this. Let's pull all this, you've had a great quarter, let's prepare for ... There will be a little bit of a tax hit on that.

Casey Hiers:
Some growing pains sometimes, you get used to that.

Kevin Rhoton:
Sure. We do get that. I hate paying taxes. Everybody hates paying taxes and they don't really want to. But the IRS has spent many, many years on closing loopholes on how to get out of paying taxes.

Casey Hiers:
What are some challenges sometimes, when a practice owner goes from maybe their old way, where it was terribly inefficient and they're paying probably more in taxes, versus getting it right? What are some of the growing pains or things that are potentially out there? Going from your canned projections to more of a live time updated, truly custom.

Kevin Rhoton:
I think it's the, I don't necessarily want to say behavior, but it's what they're used to.

Jarrod Bridgeman:
Is it more on the education side of things?

Kevin Rhoton:
Education.

Jarrod Bridgeman:
Explaining why this is the way it is?

Kevin Rhoton:
Yeah.

Casey Hiers:
"It used to be 25,000. Why'd it go up to 36?" Well, it can also be viewed as it can be a good thing.

Kevin Rhoton:
Yeah.

Casey Hiers:
Something positive happened. If you go from paying 25 to 15, on the surface level, you're paying less in taxes. Well, why? Producing less, collecting less, making less.

Kevin Rhoton:
Well, yeah. Ultimately, really the only way you can get out of paying some taxes is to not be successful. If you're going to be successful-

Jarrod Bridgeman:
Or dead.

Kevin Rhoton:
Well, even then.

Casey Hiers:
You can still vote.

Jarrod Bridgeman:
That's true, that's true. I forgot.

Casey Hiers:
You can still vote.

Kevin Rhoton:
They'll still take some taxes from you. No.
Not looking at it just on a quarterly basis. "Oh, this quarter I have to pay so much." Looking at it at an annual basis of, "I paid taxes when I had a good couple months, my tax payment was a little less when I bought that new piece of equipment." Then at the end of the year, you don't have $150,000 tax surprise. So many come in wanting better tax services because of that year-end tax surprise of 150, we've seen 200, huge amounts.

Jarrod Bridgeman:
Because they really didn't expect hardly anything because they were-

Casey Hiers:
They were paying.

Jarrod Bridgeman:
Paying their quarterly.

Casey Hiers:
Yeah.

Jarrod Bridgeman:
Yeah, not what they should have.

Casey Hiers:
Here's a pivot for you. How badass were our forefathers, 300 years ago, when for a two or three percent tax on tea, and they had enough. Now we're paying 35, 40, 45, 50 percent taxes but we've got our Uber Eats and our NFL so we're all good, man.

Jarrod Bridgeman:
That's right, that's right.

Casey Hiers:
We're soft. We're soft. Back then, they're like, "Wait, you're going to tax my tea 2%? It's on."

Jarrod Bridgeman:
Yeah. Yeah. They had that tea party and everything.

Casey Hiers:
I read too much. That just came out of nowhere. It's not really helpful for Kevin today.

Jarrod Bridgeman:
Kevin, if we have some people out there listening and maybe they're currently paying their quarterly taxes but aren't quite sure if they're doing this correctly, what is some baseline advice you'd have for them to get back on the right path?

Casey Hiers:
Send a strongly worded email to your current CPA.

Kevin Rhoton:
Yeah. Hopefully-

Casey Hiers:
I wonder what would happen if a lot ... Sorry to interrupt you. A lot of our listeners are clients and they're like, "Oh, I get it. That's what they do." I wonder those, if they said, "Hey, I'd like you to have a forecast, look at last year, and do live time adjustments with my quarterlies," I wonder, not an answer, but would they do it, would they not do it? Would they triple the charge that they charge you for it?

Kevin Rhoton:
Yeah, they'd charge you a lot more.

Casey Hiers:
Yeah.

Kevin Rhoton:
Hopefully, practice owners would want-

Casey Hiers:
You get what you pay for.

Kevin Rhoton:
Yeah. Yeah, you get what you pay for. Practice owners should want monthly financials followed up with quarterly estimates to get these right from their accountant. Waiting until just year-end, "Here's all my stuff, do my taxes," that's where that problem comes in. You should want that on an ongoing basis throughout the year, talking to your CPA to go through all this to avoid those tax surprises.

Casey Hiers:
Actually, the red flag is if your quarterlies are exactly the same four in a row, that might be your red flag that you're getting some canned service.

Kevin Rhoton:
Exactly. If you have no idea what your monthly net income is or year-to-date income is, where that's going. That swings up and down, throughout the year.

Casey Hiers:
There's so many areas with tax, especially in the dental industry that are unique, they're nuanced, you need forensic experts in the field. It's crazy how many people we've talked to who, "Yeah, we work with somebody who is dental-ish specific," and those are some of the worst offenders. I used to think that was a badge of honor, and then when we see some of the tax returns and it's frightening what they see, the kind of work that gets done.

Kevin Rhoton:
Yeah. We've seen a lot of autopilot, fancy financial statements. Actually, we've had quite a few clients come to us recently who do get those monthly financials, a nice, pretty portfolio of, "Here's bars and graphs."

Jarrod Bridgeman:
A lot of colors.

Kevin Rhoton:
A lot of colors. "This is what everything did."

Casey Hiers:
It didn't lead to not getting a tax surprise.

Kevin Rhoton:
Yeah. There was no action items.

Casey Hiers:
Well, that was for the dentist to look at and then figure out what they wanted to do.

Jarrod Bridgeman:
Right, right.

Casey Hiers:
Because any additional proactive advice from the CPA is going to nickel and dime and cost them.

Kevin Rhoton:
Yeah. It was all just reactive information.

Casey Hiers:
Yeah.

Kevin Rhoton:
No proactive advice.

Casey Hiers:
Pay taxes.

Jarrod Bridgeman:
Right.

Kevin Rhoton:
Yeah.

Casey Hiers:
The more you pay, well you're probably doing something right. But unfortunately, when we look at things, there's a lot of areas and it has nothing to do with your car and your kids, and those little stereotypical ways to get around it, that's small ball, really. But some of the other things we see, just with structures and a lot of the things we master, there's tens and tens of thousands of dollars of taxes paid that probably shouldn't have been. But then, they're complaining about paying an extra 6000 on a quarterly, but this is live time custom, this is actually taking your medicine. This is good for you.

Kevin Rhoton:
Yeah. We do, we look at the ways that we can save our clients on taxes. It's not like we're not looking for those credits, we're not looking for those deductions.

Casey Hiers:
There's a place for all of it.

Kevin Rhoton:
There is. We implement many of those, but there's so many out there that sound or look so good.

Casey Hiers:
Sexy.

Kevin Rhoton:
But on the back end, again when you take that 100,000-foot look at everything, they weren't all that great. They might have saved you on this end, but they bit you on that end.

Casey Hiers:
We were talking a couple different examples, when it's all said and done, with the kids, okay you may be up a couple grand. But if you pay them 12 or 15, and then taxes, and then there's extra complications where then they have to pay. You've done this exercise where you sound and feel really cool because "Yeah, I've got my kids on their on the website, they're models." Well yeah, there's a place for it, I'm not knocking it, but a lot of times there's so much time, and effort and energy focused on that, the net gain is minimal.

Kevin Rhoton:
Yeah.

Casey Hiers:
When these other glaring areas are more-

Kevin Rhoton:
Yeah, there's a place for it. There's not one size fits all, everybody should take this route, this path.

Casey Hiers:
It's got to be custom.

Kevin Rhoton:
It is custom, for sure.

Casey Hiers:
Well, thanks for coming in and talking us through the quarterlies, because I think the biggest thing is having the same number four times in a year actually isn't that good. If it does go up, well that stings, but it might sting a lot less than the alternative.

Jarrod Bridgeman:
Right.

Casey Hiers:
Which is congratulations, you owe $100,000 that you weren't prepared for.

Kevin Rhoton:
The worst thing is owing so much money at the end of the year.

Jarrod Bridgeman:
Right.

Kevin Rhoton:
But the second-worst thing is getting a whole lot of money back at the end of the year.

Casey Hiers:
Yeah. Good point.

Jarrod Bridgeman:
Money that could have been used better in other places.

Kevin Rhoton:
Yeah. While your different quarterly amounts might not be that steady cash flow that you think, but it is best for your cash flow in the practice and at home.

Casey Hiers:
Longterm.

Kevin Rhoton:
Long-term, exactly.

Jarrod Bridgeman:
Good. Kevin, so much for coming in today and helping us with this. Casey, we're going to be coming to St. Louis and Kansas City. It's pretty exciting to get down to the middle of the country there. We're also going to be in our hometown area of Indianapolis in a couple events here as well. If you want to check us out, go to fourquadrantsadvisory.com. At the top of the screen, there is a button that says events, if you want to check out what events we're going to go to. I'm also working on relaunching our Millionaire Dentist Podcast web page and our blog that's launching soon as well, so feel free to check it out there.
Casey, thanks so much, Kevin, thanks so much. We'll see you guys soon.

Kevin Rhoton:
Thank you.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. Thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why, year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.