2013-12-13 11:58:49 Taxes English https://quickbooks.intuit.com/r/us_qrc/uploads/2014/07/iStock_000010670760XSmall.jpg https://quickbooks.intuit.com/r/taxes/avoid-a-tax-time-surprise-by-planning-ahead/ Avoid a Tax-Time Surprise by Planning Ahead

Avoid a Tax-Time Surprise by Planning Ahead

3 min read

When you work for someone else, your employer generally withholds federal taxes from your paycheck. But when you’re self-employed, paying income tax is completely up to you. If this is your first foray into entrepreneurship, you may be wondering how to figure out what you may owe the IRS by April 15, 2014 — and when to pay. Here’s a primer in which we answer some frequently asked questions.

What Is Self-Employment Tax?

Self-employment tax is what people who work for themselves must pay the federal government for Social Security and Medicare. This is in addition to individual income tax. Sole proprietors, members of LLCs, and partners in partnerships are subject to a 15.3 percent self-employment tax (12.4 percent goes to Social Security and 2.9 percent goes to Medicare) for 2013.

How Do I Figure Out My Tax Obligation?

IRS Schedule SE [PDF] is a worksheet you can use to figure out what your 2013 tax obligation may be based on your 2012 tax return. If this is your first year in business for yourself, you’ll need to estimate how much money you will earn by Dec. 31. If your business earns a net income of $400 or more in 2013, you will owe self-employment taxes.

When Should I Pay My Taxes?

Because the self-employed don’t have taxes deducted regularly from their paychecks, the IRS expects quarterly payments toward what you estimate you’ll owe for the tax year.

“Quarterly tax payments are important for small-business owners because they avoid the shock of a big tax bill at the end of the year,” says Vincenzo Villamena, CPA and managing partner at Online Taxman. “Making quarterly payments also avoids the penalties and interest associated with failing to pay.”

The IRS expects to receive estimated tax payments by a fixed due date each quarter. If you underpay or miss a quarter you could be charged a penalty even if you are eventually eligible for a refund. Form 1040-ES is the voucher to send in the mail with estimated tax payments made by check or money order. The IRS also offers options for paying taxes with credit and debit cards online or over the phone.

Villamena says there are clients who wait until the tax year comes to a close to make themselves current on their estimated quarterly payments.

“Many people wait until the end of the year to do this, to ensure their cash flow needs are met,” Villamena says. “They are paying themselves and the government a larger sum to reflect the final figures for the year.”

Villamena adds that it is particularly important for shareholders of S corporations to take salaries and make estimated payments based on them. “A 941 form [PDF] must be filed every quarter identifying the salary and the associated taxes being paid,” Villamena says. “If not, it can be construed that the taxpayer was avoiding paying Social Security taxes.” (For S corporation members, the 941 form must be filed quarterly, even if no wages are earned.)

How Do I Make Sure I Can Pay My Quarterly Estimates?

Veteran small-business owners advise planning ahead: Figure out what you’ll need to pay and set the money aside.

“I’ve owned my own business for more than a decade now, and while quarterly tax days aren’t the days I most look forward to, at least I’ve eliminated the surprise and the risk by doing two things,” says Gretchen Roberts, president and CEO of Verde Direct.

The first thing, Roberts says, is budgeting for tax payments. “If you’re able to project your earnings, or even just estimate a quarter’s earnings, you should be able to estimate taxes, too, and budget them into your overall income statement.”

The second thing that works for Roberts is saving the money as it comes in.

“After I’ve calculated the approximate percentage in taxes I’ll pay, I set aside that percentage from every client’s payment,” Roberts says. “So if I think I’ll pay 15 percent in taxes and I get a $1,000 check, I put $150 aside immediately.”

Of course, she adds, “It’s still not fun to pay taxes when the money is set aside and ready to go, but at least it’s just that — set aside and ready to go.”

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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