Whether you’re newly self-employment or have been your own boss for a while, you’ve probably got taxes -- quarterly and otherwise -- on your mind. And well you should: Although we’d all rather spend our time building the business we’re passionate about, we still have to pay Uncle Sam regularly along the way.
1. Understand what the self-employment tax is
Self-employment tax (SE tax) is simply Social Security and Medicare tax for individuals who work for themselves. If you were employed traditionally, your employer would contribute half of these taxes, and the other half would be withheld from your paycheck. When you are self-employed, you are responsible for paying the whole amount.
You can figure out your estimated SE taxes by using an accounting program to calculate your ongoing income and expenses. I love using the QuickBooks Self-Employed platform for this. You can connect your bank accounts and credit cards, and, if you keep your records up to date, you will always have accurate calculations.
Many CPAs, including my own, send coupons and envelopes for clients to mail-in checks for estimated taxes. My CPA figures the amount based on what I made in the prior year. Using that method, if you have a better year than expected, you may not pay the right amount at the right quarter. QB Self-Employed will track your SE tax in real-time so you have an exact figure.
2. Save all your receipts
Scan/take a picture of your receipts for business-related expenses, then upload them to your accounting platform. I have a side-gig as a yoga teacher, and I can count expenses such as my yoga clothes, seminars for additional training and business insurance as work-related expenses. Depending on what you do and how you run your business, you may be able to deduct things like having a home office or the miles you drive.
3. Track every dollar
Every single dollar counts, including cash, so track money in and money out meticulously. Again, the more detail you have in your sales receipts and invoices, the better. I think many new sole proprietors get so involved in their businesses, they forget to carefully track every penny.
4. Pay quarterly estimated-taxes on time
Estimated taxes quarterly are due as follows:
Quarter 1 (Jan 1 to Mar 31): 4/15
Quarter 2 (Apr 1 to Jun 30): 7/15
Quarter 3 (July 1 to Sep 30): 10/15
Quarter 4 (Oct 1 to Dec 31): 1/15 (of the following year)
The payment envelope must be postmarked no later than those key dates or else you’ll have to pay a penalty -- and no one wants to do that! These estimated taxes are applied to the total amount of self-employment tax that’s due at the end of the year.
5. Use accurate estimations
The amount of estimated tax you pay quarterly is calculated on how your business performs each quarter. For example, I will enter all paid invoices and expenses for the first quarter of 2018, which is January 1 to March 31. My accounting program tells me my earnings and the estimated amount I’ll owe on April 15, the deadline for Q1 taxes.
If your new venture is seasonal in nature (lawn care, snow plowing, teaching swim lessons), some quarters will have higher income than others. You want to pay the right amount, in the right quarter, to prevent over- or under-payment.
6. Keep a PDF of your estimated tax payment
When your estimated tax payment clears the bank, I highly recommend going to your bank’s website and downloading a PDF of the front and back of the check. If you are ever audited and need to prove you paid your estimated payment, having the PDF in the cloud lets you easily prove payment. Remember, many audits happen years after the return is filed. Trying to get the bank to send you a years-old copy to prove you paid will cost you time and money.
7. Use the IRS as a resource
The Internal Revenue Service is an amazing resource for new business owners who want to be compliant. The IRS offers a virtual workshop with 9 lessons that walks you through all the rules and laws.
8. Contact a professional
If taxes and the IRS still scare you, contact a pro. As a bookkeeper, I love working with small businesses, and no business is too small. A good bookkeeper should work with you so your business can grow and thrive -- and so you can sleep at night!
This was helpful - thank you! Quick question... does a sole proprieter have to submit quarterly taxes or can you elect to do it once per year?
In order to avoid paying any penalties, most self employed who net over $400 need to pay on a quarterly basis. There is a form called 1040-ES that you can use to figure out if you will need to pay estimated payments or not and how much.
The way I look at it is if you have to pay SE tax, you should pay it quarterly.
Also be careful about saying you can deduct your yoga clothes..... most work clothing is npt tax deductibale unless it has your business logo on it and is only worn at work. Or else everyone would be deducting suits and yoga pants and saying they never wore it other than work. Not saying you can't, but just pointing this out so others know the guidelines and don't think they have all these deductions and then have a suprise at tax time.
Other than that, great article to fill others in. I feel like this is a topic that most don't understand and you were able to break it down and explain it very clearly.
Thank you for mentioning the clothes. Yes, they are logo based and required uniform to work at my studio. I wish I could deduct all of my yoga clothes!
Thank you for mentioning the clothes. Yes, they are logo based and required uniform to work at my studio. I wish I could deduct all of my yoga clothes, especially the Lulu lemon ones.
See the answer from @JenPM. I submit mine quarterly based upon the earnings I entered in my QuickBooks Self-employed program. Sometimes your CPA will guide you here as well. Mine actually gives me the coupons all filled out with the amounts required (based on the prior year’s earnings). We also have an LLC business and a Sub-S corporation that generates income. Our taxes are a bit complex.
@lynda could you please point us in the right direction to the forms needed for filing self-employed taxes? That would be so helpful! Thank you!
You file schedule C on your 1040 return to show your business earnings. You can actually buy a bundle. QB Self Employed and Turbo Tax to track and do your return and pay your taxes.