In addition to the many advantages of working for yourself or owning your own business, there are also an added number of responsibilities, including budgeting for your tax payments. For people who work for someone else, this isn’t an issue; their income taxes are automatically taken out of their paychecks. For business owners and the self-employed, it falls on the individual or business owner to make sure their taxes are paid on time. Here are several tips for how to pay taxes when self-employed.
How It Works
Everyone is required to pay taxes if they bring in more than a certain amount of money per year. For the self-employed, you’re not only required to pay taxes, but also to make quarterly tax payments if you or your business is expecting to owe more than $1000.
These tax payments are due as follows:
Q1 — January 1 to March 31: April 15
Q2 — April 1 to May 31: June 15
Q3 — June 1 to August 31: September 15
Q4 — September 1 to December 31: January 15
(Note: if the due date falls on a weekend or holiday, payment is due the next business day.)
How Much Do I Pay?
In practice, these tax payments should reflect the amount made each quarter, although the IRS provides an estimated tax worksheet that allows the self-employed to calculate their estimated tax payments as an average of their expected adjusted gross income for the year. Liberty Tax® also offers an excellent tax estimator as well.
For business owners and the self-employed, however, it can be tricky to estimate gross income, especially if the business is seasonal or if revenues are up or down from previous years. The IRS may penalize the business or individual if they’ve underpaid on their taxes by a significant amount or failed to pay quarterly taxes on time, making it even more important to ensure taxes are paid.
What’s My Tax Bracket?
The first step in budgeting for tax payments is to determine how much you owe. That amount is dependent on how much you make in your business or as a self-employed individual. Tax rates are a percentage of your adjusted gross income, which is your gross income minus your business expenses. The percentage of your income you owe varies depending on your filing status and your income bracket. These brackets are listed in the IRS’s estimated tax form or the IRS tax tables listed here.
How Do I Budget for My Tax Payments?
Once you’ve determined what percentage of your income you’ll pay in taxes, you can come up with a plan to make sure you have the money available when those tax payments are due. There are several options to choose from. In each scenario, it’s best to set up a savings account where you can keep the funds you’ll use to pay taxes.
- Automatically put a percentage of each payment you receive into the savings account. For example, if you are single and make $40,000 a year, you’re required to pay 25% of your adjusted gross income in taxes. In this scenario, you would put 25% of each payment you receive into savings to cover your quarterly tax payments.
- On a monthly basis, calculate how much you earned for the month and set aside a percentage of that amount. This method works better for businesses that have a larger amount of cash available. However, if you think you’d be likely to spend the money during the month if it’s sitting in your checking account, you may want to opt for the first option instead.
- Determine your quarterly tax payment, then earmark payments from certain clients for taxes. For instance, if your estimated quarterly tax payments will be $3000 and you have a regular client who pays you $1000 a month, you can plan to always apply their payments directly into your savings account to pay taxes. This option works best for people and businesses that have a fairly large cash cushion.
Even if you’ve used the IRS worksheet to calculate your quarterly tax payments ahead of time, it’s important to double-check your income throughout the year. Although you’re required to pay more than your estimated tax amount if you earn more than you thought you would, you’re also permitted to pay less if your income is lower than you expected in any given quarter. Whether you’re doing your books yourself or have an accountant or CPA to help you, when determining how to pay taxes when self-employed, it’s best to check your revenue on a regular basis to ensure you’re paying the correct amount.
For more information on all things taxes, contact Liberty Tax® directly at 1-877-at-Liberty, or visit a conveniently located Liberty Tax® office near you. For real-time updates, follow Liberty Tax® on Facebook and Twitter.