Estimated Taxes

[bacterozoid]

I'm beginning to get a monopoly on this category :)

I'm a little confused about estimated taxes. I found a couple good articles on how they work and am confident I can figure them out in time...but as I've never done it before, I'm a little confused about them.

As a sole proprietor, do I pay estimated taxes on my entire income? So, instead of doing my income taxes at the end of the year, I do my income taxes every quarter...including Schedule C and Schedule SE...right? Does that mean I could potentially get a refund check every quarter? I don't claim anything on my full time job taxes and don't make a lot right now on the side...

Also, what happens if I over-estimate my business profit? Do I make that adjustment at the end of the year?

I'm learning...once I've done it once or twice I'll have a better idea about this. Thanks again!

[vangogh]

You're really just making an estimate of what you think you'll earn and then you can adjust it each quarter. If this is your first year in business you can probably get away without having to file any estimated taxes. However you'll still have to pay in April so you may decide it's better to pay something now.

Form 1040es (http://www.irs.gov/pub/irs-pdf/f1040es.pdf?portlet=3) (links directly to PDF for 209) has a worksheet. It's pretty easy to fill out. You start with an estimate of the money you'll make as an individual from your business and then follow along with the instructions to determine what you're payments should be. Each year I believe you have to pay at least what you paid the year before, but ideally you'll have to pay more since you're making more money.

One line on the form will tell you what you should expect to pay for the entire year and you'll usually pay 1/4 each quarter. If you find yourself making more money during the year you can pay more and if you find yourself making less you can pay less as long as you still pay in total what you paid in last year.

If you've estimated well you won't owe anything come tax time. You'll likely use whatever refund you might get as your first estimated payment for the next year. If you didn't estimate so well you'll have to pay in April.

You aren't having to do your taxes though through all this. It's just an estimate. Your first year or two it's more of a guestimate, but as you've been in business longer you'll find it easier to estimate and again if you find yourself making more or less money than you thought you can adjust the estimated payments you send in.

[Evan]

What vangogh said was correct. To just expand on this, estimated taxes are just for the income you receive which no taxes are normally withheld. So if you lost your job but had $30,000 of interest income -- you'd want to pay estimated taxes so you aren't nailed at the end of the year.

You could also figure out what your estimated payments should be and give your employer a new W-4 to adjust your withholdings. Say you estimate to owe $520 in taxes, why not just have an extra $10 withheld every week? You can very easily do this.

Why make estimated tax payments? Well, the government wants their money NOW, not later. And if you are required to file estimated tax payments and don't do so, they will add penalties and interest to what you should have paid.

Make sure you work with a competent business accountant to file your tax return, especially in your first year.

[bacterozoid]

estimated taxes are just for the income you receive which no taxes are normally withheld

Ok, so that first line on the 1040ES (Adjusted gross income) is what I expect to make that does NOT have taxes withheld. So I basically enter what my business expects to make, correct?

I think it may be worth it to get some professional help my first time around...then I'll at least have a better understanding of this and a proper example.

[vangogh]

The first year I had to file taxes on my business I went in to the SBA and talked to someone who walked me through much of it. The rest I had to figure out on my own. Nothing wrong with consulting a professional, but know the free option with the SBA is there.

[bacterozoid]

I wasn't aware of the SBA! I've got an office just 20 minutes away...looks like I may take advantage of that. Thanks. :)

[Evan]

For the 1040-ES, your AGI is based off all taxable sources of income. The purpose is to determine whether estimated payments need to be made, based on all taxable sources of income.

Keep in mind, you get a deduction for 1/2 of self-employment taxes that is taken into account as part of AGI.

Say you estimated $1,000 of Schedule C income. SE tax is based on 92.35% of this income. If your income, multiplied by that percentage, is less than $400, you're not liable for SE tax. So $1,000 x 92.35% = $923.50 (amount subject to SE tax) x 15.3% = $141.30 (amount of SE tax). Divide in half = $70.65 (amount of above-the-line deduction on 1040).

Now in this instance, I can tell you that $141.30 isn't enough to warrant estimated tax payments. But these payments could STILL be made, or if you have a job where you receive a W2, just fill out a new W4 to adjust accordingly. In this case, assume it's $150 you owe, and divide it out by the remaining pay periods. Then these payments are already made on your behalf.

So your AGI, assuming that you had no W2 or interest income would be:

Schedule C income: $1,000
Deduction 1/2 of SE: $71
AGI: $929

Income taxes are then based off that extra $929, and then you have to add the $141.30 to your taxes to be paid.

...and this is just the federal government. States often also require estimated tax payments, so be sure to check out your state department of taxation/revenue, etc.

[huggytree]

im wondering why you dont have an accountant who tells you what you need to do?

i dont worry about any of it...i spend my time worrying about making $ and let my accountant handle my taxes......

i think your worried about the wrong things.....hire people to do things for you...spend all your time making as much as you can...

i used to stain my deck, do home repairs, help clean the house....now i pay people

I can make more $ doing what i do than i have to pay the people to do the small stuff around the house....i assume thats the case with most of us here?

[Steve B]

Very good point HT - assuming he's busy enough that any time spent doing taxes is preventing him from getting more business. Of course there are other reasons to have an expert do your taxes - they can probably save you money and/or keep you out of trouble. I think every small business should have a good accountant and a lawyer on hand.

A lot of business people don't see the benefit in hiring others to allow them more time to grow their business. Staining the deck is a good example.

[Evan]

I do agree it is best to "outsource" tasks which you certainly aren't certain about, or which prevent you from doing what you need to do. But certainly understanding the basics will prevent you from getting screwed.

Your accountant may ask all the right questions to get the job done; but you also need to ask the right questions to understand what he is doing. While we may prepare a tax form for you, ultimately it is your signature on the form. You should have some understanding of what we put on the form, though perhaps not all the nitty gritty.