Authored by Douglas Mefford in Taxes
Published on 06-25-2009
The greatest inevitability in doing business is the payment of taxes to the government. The individual worker has tax withheld from each paycheck and only needs to file once a year to balance his tax obligation. A self-employed individual however, must estimate his future tax liability and pay it in to the government every quarter. In order to avoid having too great a discrepancy between the paid in amount and the annual total, one must learn how to accurately estimate the amount due.
The self-employed include consultants, contractors, and freelancers. Their income should be such that they will expect to pay in at least a thousand dollars a year in federal income tax. As well as federal tax, you will be required to estimate and pay state and local income taxes if applicable in your area. For the self-employed individual who has employees working for him there is the need to figure out the Federal Insurance Contributions Act (FICA) and Social Security taxes for them.
In estimating these taxes you should try to estimate to at least 90% of the total tax due. This is so you can avoid not only a large unpaid amount at year’s end but to also avoid underpayment penalties. Most self employed individuals will estimate on the calendar year. There are special requirements if filed using a fiscal year.
To begin you will need to start by figuring an estimate on what you will make for the entire coming year. If you have previous year’s tax records to guide you, it will be easier. Begin by filling out Form 1040, Schedule C or C-EZ as well as a Schedule SE. The Schedule C is where you list all taxable income. You will then figure in any allowable business expenses. If you have further income from sources other than your self-employment business, these too will need to be figured into your gross income amount. Personal expenses such as child support or alimony payments are also to be figured.
For relatively steady businesses it is not too difficult to come to a quarterly figure. If your business income fluctuates drastically from month to month it may require filing an adjusted W-4 so you do not end up paying in too great or too little an amount. Keeping a current record of all income and expenses on a spreadsheet will help keep the records clear and helps with itemizing deductions. There are also websites that offer tax services that can help you figure out your estimated quarterly tax amounts.
In order to maintain your payments in a timely fashion and avoid late fees and penalties, open a special savings or escrow account. Deposit an estimated percentage from every payment received and do not allow yourself to remove money from this account. In this way you will have a better chance of having the money for your estimated quarterly taxes on hand when the payment is due.