For those who start a home business, there are seemingly endless number of things to get done. So when it comes to taxes, the inclination is to put things off. Might as well wait until April, right?
Well, this may actually work for many aspects of taxes. Yet there is one area where you really need to be proactive — that is, with estimated tax payments.
This can actually be a big surprise for first-time entrepreneurs. And this is understandable. When you have a job, your employer takes out taxes from your paycheck. Oh, and there’s a good chance you’ll get a refund.
Keep in mind that the federal tax is based on a pay-as-you go system. So when you have your own business, you have the obligation to do the paperwork and make the ongoing tax payments, such as for federal income taxes, Social Security, Medicare and unemployment.
Then what do you need to know?
Basically, if you expect to pay $1,000 or more in taxes, then you will need to make estimated tax payments, which can be done in two ways:
- Pay at least 90% of the tax owed for the current year or
- Pay 100% of last year’s tax (although, it is 110% if your adjusted gross income is over $150,000 or $75,000 if you file separately).
To come up with this amount, you can use online prep software, such as from TurboTax. Or, you can try out my calculator.
Link to my calculator – http://www.bizdeductor.com/estimated-taxes/
Regardless of the approach, you will split up the estimated tax into four equal payments, which have the following deadlines:
| Date | Quarter |
| April 18th (this year’s deadline for your tax return) | First Quarter |
| June 15th | Second Quarter |
| September 15th | Third Quarter |
| January 15th | Fourth Quarter |
In terms of the payments, you have a few options. One to fill out Form 1040-ES and send a check. And make sure it is payable to the “United States Treasury” not the “IRS.” You should also include your Social Security number as well as a memo that says “2016 1040-ES”.
Next, you can make estimated tax payments with electronic options, such as by using the Electronic Federal Tax Payment System (EFTPS) or IRS Direct Pay.
Links:
- 1040-ES: http://www.bizdeductor.com/estimated-taxes/
- EFTPS: https://www.irs.gov/uac/EFTPS-The-Electronic-Federal-Tax-Payment-System
- IRS Direct Pay: https://www.irs.gov/Payments/Direct-Pay
Interestingly enough, if you or your spouse has a job, then you can avoid having to pay estimated taxes by increasing your withholding. You can do this be filling out a new Form W-4.
Now as with anything to do with the IRS, estimated taxes is certainly far from a fun thing to do. But by going through the process, you should save some money by avoiding having to pay penalties and interest. Besides, you will also likely not be caught short when April rolls around and you do not have enough to pay your taxes.
