Making Estimated Tax Payments

Q. I am a 1 person (no employees) sole proprietor.  What would be the best way for me to calculate taxes and make quarterly tax payments (both Fed. and State)?

A. This is one of the most common questions I get from self-employed individuals who are just starting out.  Basically, estimated payments in a self-employed environment is the equivalent to withholding from an employee.  The object is to not pay too much and of course, not pay too little.  Let’s look at a few scenarios to answer your question completely:

1. new business with no history
2. business with history
3. going out of business

You must make estimated payments if you think your tax liability will be more than $1,000 in a calendar year.  The tricky part however is guessing how much income, and therefore tax liability, you will have.  In scenario 3, if your business is losing money and you anticipate having no profit, you may not actually need to make payments.    In scenario 1, if you previously had W-2 wages, you may wish to make payments equivalent to the previous year’s liability.  This number is found on your tax return.  In scenario 2, you need to pay at least 90% of the estimated liability due for the current year, or 100% of the tax liability from the previous year as estimated payments.

There are penalties for underpaying your liability as well.  The best way to get this right is to meet with a CPA or well-qualified tax preparer and go over your estimates for the current year.  CPAs can also help with other parts of your business plan as well to set you up for the best chance of success.

Also keep in mind that the IRS no longer accepts paper coupons for estimated payments.  You need to remit through the Electronic Federal Tax Payment System (EFTPS).

The rules for making estimated payments to your state depends on the state.  Check with the Department of Revenue in your states. Your CPA/tax preparer can help with this as well.

Live in one state, work in another

Q. I live in Michigan and just started a new job working in Illinois.  I’ve never been in a situation with two states before.  My payroll department wants me to fill out all these different forms.  What should I do?

A. I love multi-state tax situations!  It’s like job security for accountants.  The answer to your question Read more »

How much tax for self-employed

Q. Is there a calculator that would help someone determine how much estimated payments I can make since I am self-employed?

A. Unfortunately, there is no easy-to-use tool for calculating self-employment liability for estimated payments. Because the self-employed have to match Social Security and Medicare, yet get a credit for it above the line on the 1040, the actually liability is much more complicated to determine.

The number you would start with is based on last year’s tax liability. This is determined by your accountant when you complete your 1040 form and associated schedules. Essentially, you can split last year’s liability into Read more »

FICA and Medicare Tax Payments

Q. Where do I send FICA, Medicare, taxes?

A. If you are an employer, FICA, Medicare and Federal withholding taxes should be deposited according to the schedule assigned by the IRS to your company. Very small employers can deposit and report these withholding amounts on Form 944 annually. The other deposit requirements are Monthly, Semi-weekly and Daily depending on the amount of the deposit. All of this is discussed in Publication 15 in section 11, “Depositing Taxes.”

To answer your question, you can Read more »