Taxes can be a tricky road to navigate for self-employed professionals. Employers are required to withhold federal income tax as well as Social Security and Medicare taxes from employee’s payroll checks, but as an independent professional you’re on the hook to do this yourself.
IRS Schedule C (Form 1040), Profit or Loss From Business, is a standard, required part of your annual tax return (unless you are eligible to file Schedule C-EZ), and quarterly estimated tax payments are due four times a year.
Understanding and staying on top of tax payments is important to avoid fines, keep your business finances in order, and make the most of business-related deductions. Follow these four best practices to take the stress out of tax time.
If you are self-employed and expect to owe $1,000 or more in taxes (or $500 or more for corporations), you’ll need to make quarterly estimated tax payments throughout the year. Paying taxes quarterly helps to eliminate a massive tax burden at the end of the year both for you and for the government.
Quarterly payments are due on April 15, June 15, September 15, and January 15 of each year. In order to calculate quarterly payments, use Form 1040-ES, Estimated Tax for Individuals, which contains blank vouchers you can use to mail in your estimates, or pay online with the Electronic Federal Tax Payment System (EFTPS).
Whether you’re mailing in your vouchers or paying online, set a reminder for at least a week beforehand so your payment arrives on time.
Even for the most seasoned self-employed professionals, knowing how much you owe can be a challenge given the ups and downs of independent work. Essentially, you’re trying to estimate what you’ll make for the year, figure out taxes on that income, and divide it into four payments. If you over-estimate, you’ll likely get a refund. If you underestimate, you’ll owe more money come spring. If you don’t pay at all, or wait to report everything until the end of the year, don’t be surprised to see an audit notification, penalties, or interest payments.
Form 1040-ES walks you through creating a quarterly estimate by looking at your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If you’re familiar with this process, refer to your previous year’s return to get an idea of what your quarterly payments should be. Estimate paying slightly more than you did last year avoid underpayment. If you’re new to self-employment, consider working with a tax advisor to help calculate what’s best for your situation.
Understanding how self-employed taxes work, staying organized, and keeping track of your payment history can vastly streamline the tax filing process. For example, if you’re a seasoned independent contractor, being able to refer to your income records for the past few years will make it much easier to estimate your average annual income as well as your taxes owed.
There are also numerous self-employed tax deductions available, so be sure to save receipts and keep detailed records of things like business travel, transportation expenses, and insurance costs to take advantage of deductions for these expenses.
Set aside a little time once a week to categorize receipts, document expenses, and file any tax-related paperwork or documents. Getting in the habit of this process will help to ease the burden of quarterly and annual filing and ensure you don’t overlook deduction opportunities.
The IRS website’s Self-Employed Tax Center contains a wealth of information about the tax filing process and has links to all the forms you’ll need. In addition to quarterly payments and your Schedule C, you’ll also need to report Social Security and Medicare taxes by filing the Schedule SE (Form 1040) for Self-Employment Tax.
Like any tax preparation, this can all seem overwhelming, but by creating an organized system, maintaining your records, and starting early you can steer clear of penalties and fines. Working with a professional tax preparer or service is recommended to help navigate ever-changing forms, rules, and tax laws, and to identify and claim all of your eligible self-employment deductions.
If you’d rather ditch the quarterly tax burden all together, MBO’s services for self-employed professionals allow independents to take advantage of exemptions and deductions without the hassle of filing quarterly estimates or itemizing on a Schedule C. Give us a call today to learn more.
This content from MBO Partners does not constitute legal or financial advice.
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News and notes for independent contractors and their clients. This is the February 27, 2017 edition.