Have you ever wondered about whether you need to make prepayments on your estimated taxes? Have you gotten a notice from the IRS saying you need to prepay taxes during the tax year? This is not just for payroll taxes, but for taxes based on the income the business is making.
There is an actual form 1040-ES that will help you calculate a more specific amount that helps recognize what your self-employment taxes would be. (See me if you’re ready to be more accurate.) However, my rule of thumb is 20-25% of your gross revenues, this is your income before you subtract out expenses. This is a nice midpoint on the income tax rate scale that should be easy for small business owners to calculate and should help cover the self-employment taxes as well. The risk of calculating this way is that you may have so much in expenses that you don’t actually make a lot of net income or you might actually incur a loss. This should be obvious if we’re keeping your books up to date throughout the year. If you’re incurring a loss, then this is just good ‘ole temporary savings that you can pull out to pay yourself after your tax return is complete.
The next question is when to start paying quarterly taxes. If you’ve never done it before or just got that nasty letter from the IRS I’ve got another rule of thumb here. Start paying if you’re expecting to be taxed $1,000 or more. If you’re using the savings method I recommend for those just starting out or doing it on their own, it’s when your savings account reaches $1,000. That’s the super easy method to figuring this part out. If we use the 1040-ES for a more accurate picture, we’ll know if you’re going to meet that $1,000 a lot sooner and can make plans more specifically for the due dates required by the IRS. (See me if you’re ready to be more accurate.) There are penalties if the IRS believes you should have known, or have already been warned, and did not make these quarterly tax payments. The due dates are posted on the IRS website and you can always hit me up for helping you to make plans for these.
The IRS has a great EFTPS website for you to make these quarterly tax payments. The due dates are critical to meeting these guidelines. If we use the 1040-ES we can also get you paper vouchers to mail in your payments. However, the EFTPS helps avoid any delays in the postal mail and is free if you use your bank account.
Below are some links to the IRS website for further details on this topic if you wish to research this further. Please contact me today to help you with any questions or on managing your estimated taxes.
https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
https://www.irs.gov/pub/irs-pdf/f1040es.pdf
https://www.irs.gov/payments/eftps-the-electronic-federal-tax-payment-system