The freedom and flexibility of being your own boss comes with the responsibility of managing your taxes. Unlike traditional employees, self-employed individuals are responsible for paying their taxes throughout the year on a quarterly basis rather than just one time during tax season. But how does a business accurately estimate those taxes and be confident they are paying enough to come up even at the end of the year?
Steps to Stay Ahead of the Game
Here are seven helpful steps for the self-employed to stay ahead of quarterly estimated taxes, avoid potential penalties, and maintain financial peace of mind.
Step 1: Calculate Estimated Income
Initially, it is key to accurately estimate your yearly income. Start with a review of past income and expenses. Use this data from previous years to project earnings for the current year. Keep in mind that underestimating your income could lead to penalties, so it is better to be conservative.
Step 2: Calculate Estimated Deductions
Identify potential deductions and credits that apply to the self-employed, such as home office expenses, business-related travel, equipment purchases, and health insurance premiums. These factors can help you arrive at a more accurate estimation of your taxable income.
Step 3: Calculate Tax Liability
Using that estimated taxable income, calculate your tax liability for the year to have an accurate picture of the total you will need to pay. Keep in mind both federal and state taxes, if applicable. Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES, to figure estimated tax.
Step 4: Calculate Quarterly Payments
Divide your annual, estimated tax liability by four to determine the amount you should pay each quarter.
Step 5: Schedule Quarterly Payments
The Internal Revenue Service (IRS) requires payments to be submitted typically around the 15th of the months of April, June, September, and January. Specific dates vary by year. While there is a due date, you may choose to submit quarterly payments earlier than the deadline. The key is to schedule the payments and know they will be debited at the specified date and time, and then stick to them!
Step 6: Open a Separate Savings Account
One way to ensure you make quarterly payments on time and per your planned schedule is to open a separate savings account dedicated to your estimated tax payments. Deposit the calculated amount into this account each month, so you are prepared for upcoming payments.
Step 7: Maintain Thorough Records
Finally, keep thorough records of your income, expenses, and estimated tax payments. If the IRS ever audits your business or paid taxes appear deficient at the end of the year, you can look back through your records to identify your error. More importantly, you can make proper adjustments for the upcoming year.
Get Expert Advice from KPN
If these steps seem arduous, don’t fret. At KPN, it’s our job to handle these steps and save you valuable time, energy, and potential worry or penalties. Give us a call to learn how we can help you stay ahead of your quarterly estimated payments and run your business with an optimized tax strategy.