You’ve done it, started a business and now you are your own boss. With a business comes the responsibility of keeping track of your books and staying on top of paying your taxes to Uncle Sam. This article won’t hire you a bookkeeper, but it will break down the basics of paying taxes on self-employed income.
What is Estimated Tax Payments (ETP)?
When you are an employee, your employer withholds taxes from every paycheck and sends that money to the IRS on your behalf. Essentially you are paying your taxes as you go. Estimated tax payments allows individuals to pay not only their income tax, but other taxes such as self-employment tax and alternative minimum tax as their business generates income.
Why is this important?
If you don’t pay enough tax through estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
Tips to be prepared
Being prepared will always save you headaches and surprises later.
First figure out if you need to pay estimated tax payment.
Per the IRS, “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.”
Refer to a prior year tax balance or ask a tax professional to help estimate your current year’s tax liability based on the business’s current numbers. You can also use the Form 1040-ES on the IRS website if you feel confident in estimating your own taxes.
If you did not have any tax liability from last year, the prior tax year covered a 12-month period, you are a U.S citizen for the year, and you don’t project any increases in net profits this year, then you don’t have to pay estimated tax payments for the current year.
Second set aside an amount for your estimated tax payments. It has become common practice for tax preparers to provide you with payment vouchers to mail in with your quarterly payments. If you don’t have payment vouchers, take either your estimate tax liability for this year or last year’s tax liability and divide it by four. You are required to make payments quarterly on the following dates: 04/15, 06/15, 09/15, 01/15 (following year). Many recommend submitting a payment weekly or monthly to create a habit of paying as you go.
Payments can be made online (https://www.irs.gov/payments), by phone, by app (IRS2GO) or by mail with a ETP voucher. The online system will take direct pay out of a checking/savings account or by card. A convenience fee will be charged for those paying by credit card.
Last, but not least, adjust your payments year to year as your business changes, and enjoy one less thing to worry about.