If you’ve recently started your own small business, you’ll find that your tax requirements are now much more complicated than before. For most folks, “Tax Day” only comes alone once per year, usually on April 15th. But small business tax preparation is more demanding.
Most small business owners are required to pay estimated income and self employment taxes each quarter, because the IRS requires a sort of “pay-as-you-go” approach to taxes. In fact, all taxpayers are required to pay their taxes on a regular basis throughout the year. For employees who receive paychecks from an employer, this ongoing payment is accomplished via tax withholding. Most self-employed business owners have no taxes withheld from their earnings, so they must pay their income and self employed tax on a quarterly basis. The IRS doesn’t like receiving a lump sum at the end of the year during tax time, though many self employed people get away with this method, as long as they aren’t making enough money to attract attention.
Ideally, all of your estimated self employed tax payments (plus any withholding for the year) should add up to the total tax you owe when you calculate at the end of the year for your tax return. If the sum of your estimates equals your total tax owed for the year, you won’t owe anything with your tax return. If you have overpaid, you will get a tax refund. But if you have underestimated on your quarterly payments, the IRS may charge you a penalty for underpayment. Of course, the complicating element is that you don’t have all the numbers you need to predict exactly what your self employment income will be next year (or next quarter, for that matter), so determining the correct amount to pay can be difficult. Many accounting software solutions and online accounting services include estimated tax calculators to make this job a little easier. These tools usually use information from the previous year’s return, plus your own estimates of income and expenses for the current year, to come up with your estimated taxes.
Many new small-business owners are not aware that they will have to pay a separate self employment tax (about 15 percent) in addition to income taxes on the net earnings from their business. This tax is similar to FICA and Medicare tax (also about 15%) which is usually split between an employee and an employer. It is VERY important that you include the impact of self employment taxes in your tax planning, so don’t forget!
