How Do I Pay Taxes When I’m Self-Employed?

December 18, 2011 by  Filed under: Taxes 

If you are a sole proprietor (aka “self-employed”), do you need to know how to pay your federal taxes? Read on to find out.

All U.S. taxpayers must comply with our “pay-as-you-go” tax system. Employees do this by having taxes withheld from their paychecks by their employers. Self-employed people do not have this luxury, so you must take specific action to make federal tax payments on your own via quarterly estimated tax payments.

How to make quarterly estimated tax payments. You have three options for making these payments:

Option 1. Electronic Federal Tax Payment System (EFTPS). The IRS has a system that allows you make payments electronically. Your payment is transferred from your bank account to the IRS. You have complete control over both the amount and the timing of the payment.

Option 2. Credit card payment by phone.

Option 3. Good old snail-mail. To do this, you must complete Form 1040-ES and send it to the IRS with a check made payable to the U.S. Treasury.

Regardless of which method you use, the quarterly payments are due on the following dates: April 15, June 15, September 15 and January 15. If a due date falls on a Saturday, Sunday or federal holiday, the due date is automatically moved to the next non-weekend, non-holiday business day. If you are sending the payment via snail-mail, the envelope must be postmarked on or before the due date to be considered timely.

How to calculate quarterly estimated payments. Doing the calculations to determine the proper amount of your quarterly payments can be tricky. And it is possible for a self-employed person to avoid these payments altogether if you and/or your spouse have enough federal income tax withheld from your W-2 paychecks.

But if you think you will owe at least $1,000 on your annual income tax return (after taking into consideration any W-2 withholdings), you should make enough quarterly payments to reduce the potential balance due to below the $1,000 threshold.

Another good rule of thumb that works especially well for folks who only have self-employment income (and no W-2 income) is called the “Safe Harbor rule”. If you make quarterly estimated tax payments equal to or greater than the 100% previous year’s federal tax liability (in four equal payments), then you meet the minimum payment requirement and it does not matter how much you owe on your annual income tax return. As long as you pay that balance due by April 15, there will be no penalty for underpayment of estimated tax payments.

Most tax rules have exceptions, and such is the case with this Safe Harbor rule: If your gross income is greater than $150,000, then you must pay 110% of the previous year’s federal tax liability to avoid an underpayment penalty.

One final comment: don’t forget that as a self-employed person, your federal tax liability includes both the federal income tax and the self-employment (SE) tax.

Looking for more small business tax deductions? For a free copy of the Special Report “How to Instantly Double Your Small Business Tax Deductions” visit http://www.YouSaveOnTaxes.com. Wayne Davies is author of 3 ebooks on tax reduction strategies for small business owners and the self-employed.

Article Source:
http://EzineArticles.com/?expert=Wayne_Davies

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