Stay Out of Trouble with the IRS by Paying Your Estimated Taxes
Before you started your cleaning business, if you worked for someone else it didn't take long to realize that your paycheck was never as high as you thought it should be. Why? Employers must withhold money for Social Security, Medicare and income taxes. When you own a business however, you are responsible for paying those taxes. But how and when do you pay them?
As a self-employed business owner, you have to estimate your own income tax. And, you don't have the luxury of waiting until April 15 of every year to pay your taxes. The IRS calls it "pay-as-you-go" tax. This means the IRS (and possibly your state department of revenue) requires that you pay income tax on a regular basis - in four equal installments throughout the year. If you don't pay when the tax is due, you may have to pay penalties for not making your estimated payments.
Who must pay estimated taxes?
If you expect to owe at least $1,000 in federal taxes you are expected to make estimated tax payments. However, if you didn't owe any taxes last year (perhaps your business was just getting started or you didn't make a profit) then you may not have to make estimated tax payments (be sure to check with your accountant for tax advice).
How do you know what to pay and when? Begin by getting IRS Form 1040-ES. This contains instructions on how to figure out what to pay and four numbered vouchers for you to send in with your payment. If you are already making estimated payments the IRS will send you this form with your name, address and social security number preprinted on the form. If you didn't receive it from them you can download it from the IRS website - www.irs.gov. You can also call the IRS at 800-TAX-FORM (800-829-3676) or if you have an IRS office in your town you can stop by and pick up the forms.
Tip. It's always good to use the preprinted return address envelopes that come with the forms. The forms and payments for estimated taxes may not be going to the
For complete details regarding paying estimated taxes, visit: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
Since tax laws change every year, it's best to check the above requirements with your accountant to make sure they're still current. CPA's are required to stay abreast of tax laws, so get your accountant's help if you're not sure what to pay. Also, if your accountant does your income taxes for the year, he should include an estimate of what you need to pay for the upcoming year. If you're not receiving that information, request it.
How does a first year business owner figure estimated taxes? You can either use last year's tax or if you are a start-up and are not expecting to make a very big profit in your first year, talk to an accountant and get recommendations.
When do you make your estimated tax payments?
Estimated tax payments are made around the dates listed below, but be sure to check from year to year, as the specific due dates change.
- April 15 (for income received January 1 through March 31)
- June 15 (for income received April 1 through May 31)
- September 15 (for income received June 1 through August 31)
- January 15 (for income received from September 1 through December 31)
The IRS also makes it easier for you to get your payments to them on a timely basis. You can sign up for an electronic tax payment service (https://www.eftps.com/eftps/). It's a convenient and free service from the U.S. Department of Treasury that allows you to make your federal tax payments electronically.
Make sure you don't pay late (or not pay at all). As mentioned previously, there are penalties for underpaying your estimated taxes. You will end up having to pay your taxes along with a percentage penalty for each day your taxes went unpaid.
Remember, there are state departments of revenue that want their share of the pie too. Check with your local state agency to see if you need to make state estimated tax payments and how to make those payments. Most will allow you to make online payments. State taxes have the same deadlines as federal, which makes it easier to remember.
When you own a business it's your responsibility to make sure you're paying your share of income taxes. Partner with a good accountant who can help you decide how much to pay and then review your income regularly and make adjustments as necessary.
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