mall business owners, self-employed people, and some wage earners should look into whether they should make estimated tax payments this year. Doing so can help them avoid an unexpected tax bill and possibly a penalty when they file next year.
Everyone must pay tax as they earn income. Taxpayers who earn a paycheck usually have their employer withhold tax from their checks. This helps cover taxes the employee owes. On the other hand, some taxpayers earn income not subject to withholding. For small business owners and self-employed people, that usually means making quarterly estimated tax payments.
Here’s some information about estimated tax payments:
- Taxpayers generally must make estimated tax payments if they expect to owe $1,000 or more when they file their 2019 tax return.
- Whether or not they expect to owe next year, taxpayers may have to pay estimated tax for 2019 if their tax was more than zero in 2018.
- Wage earners who also have business income can often avoid having to pay estimated tax. They can do so by asking their employer to withhold more tax from their paychecks. The IRS urges anyone in this situation to do a Paycheck Checkup using the Tax Withholding Estimator on IRS.gov. If the estimator suggests a change, the taxpayer can submit a new Form W-4 to their employer.
- Aside from business owners and self-employed individuals, people who need to make estimated payments also includes sole proprietors, partners and S corporation shareholders. It also often includes people involved in the sharing economy.
- Estimated tax requirements are different for farmers and fishermen.
- Corporations generally must make these payments if they expect to owe $500 or more on their 2019 tax return.
- Aside from income tax, taxpayers can pay other taxes through estimated tax payments. This includes self-employment tax and the alternative minimum tax.
- The final two deadlines for paying 2019 estimated payments are Sept. 16, 2019 and Jan. 15, 2020.
- Taxpayers can check out these forms for details on how to figure their payments:
- Taxpayers can visit IRS.gov to find options for paying estimated taxes. These include:
- Anyone who pays too little tax through withholding, estimated tax payments, or a combination of the two may owe a penalty. In some cases, the penalty may apply if their estimated tax payments are late. The penalty may apply even if the taxpayer is due a refund.
- For tax year 2019, the penalty generally applies to anyone who pays less than 90 percent of the tax reported on their 2019 tax return.
New business owners have tax-related things to do before launching their companies. IRS.gov has resources to help. Here are some items to consider before scheduling a ribbon-cutting event.
Choose a business structure
When starting a business, an owner must decide what type of entity it will be. This type determines which tax forms a business needs to file. Owners can learn about business structures at IRS.gov. The most common forms of businesses are:
Determine business tax responsibilities
The type of business someone operates determines what taxes they need to pay and how to pay them. There are the five general types of business taxes.
- Income tax – All businesses except partnerships must file an annual income tax return. They must pay income tax as they earn or receive income during the year.
- Estimated taxes – If the amount of income tax withheld from a taxpayer’s salary or pension is not enough, or if the taxpayer receives income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, they may have to make estimated tax payments.
- Self-employment tax – This is a Social Security and Medicare tax. It applies primarily to individuals who work for themselves.
- Employment taxes – These are taxes an employer pays or sends to the IRS for its employees. These include unemployment tax, income tax withholding, Social Security, and Medicare taxes.
- Excise tax – These taxes apply to businesses that:
- Manufacture or sell certain products
- Operate certain kinds of businesses
- Use various kinds of equipment, facilities, or products
- Receive payment for services
Choose a tax year accounting period
Businesses typically figure their taxable income based on a tax year of 12 consecutive months. A tax year is an annual accounting period for keeping records and reporting income and expenses. The options are:
- Calendar year: Jan. 1 to Dec. 31.
- Fiscal year:12 consecutive months ending on the last day of any month except December.
Set up recordkeeping processes
Being organized helps businesses owners be prepared for other tasks. Good recordkeeping helps a business monitor progress. It also helps prepare financial statements and tax returns. See IRS.gov for recordkeeping tips.
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Small business owners often have a running list of things to do. These include deadlines, sales calls, employee issues, banking, advertising – and taxes. The IRS can help with the last one.
Here are seven resources to help small businesses owners with common topics:
- Looking at the Big Picture: The Small Business and Self-Employed Tax Center brings information on IRS.gov to one common place.
- Organizing Tasks: The IRS Tax Calendar for Businesses and Self-Employed helps owners stay organized. It includes tax due dates and actions for each month. Users can subscribe to calendar reminders or import the calendar to their desktop or calendar on their mobile device.
- Searching for Topics: The A-to-Z Index for Business helps people easily find small business topics on IRS.gov.
- Getting Information by Email: Small business owners can sign up for e-News for Small Businesses. The free, electronic service gives subscribers information on deadlines, emerging issues, tips, news and more.
- Watching Videos: The IRS Video Portal offers learning events and informational videos on many business topics.
- Finding Forms: The Small Business Forms and Publications page helps business owners find the documents they need for the type of business they own. It lists tax forms, instructions, desk guides and more.
- Meeting in Person or Online: Small business workshops, seminars and meetings are held throughout the country. They’re sponsored by IRS partners that specialize in federal tax topics. Topics vary from overviews to more specific topics such as retirement plans and recordkeeping.
If you are an entrepreneur who owns the business this is for you. The IRS is talking about estimated taxes and withholding and as all self-employment income earners know, this applies to you. Read on!
People pay taxes on income through withholding on their paycheck or through estimated tax payments. Taxpayers who pay enough tax throughout the year can avoid a large tax bill and penalties when they file their return.
Taxpayers should make estimated tax payments if:
- The tax withheld from their income does not cover their tax for the year.
- They have income without withholdings. Some examples are interest, dividends, alimony, self-employment income, capital gains, prizes or awards.
Here are five actions taxpayers can take to avoid a large bill and estimated tax penalties when they file their return. They can:
- Use Form 1040-ES. Individuals, sole proprietors, partners and S corporation shareholders can use this form to figure estimated tax. This form helps someone calculate their expected income, taxes, deductions and credits for the year. They can then figure their estimated tax payments.
- Use the Withholding Calculator on IRS.gov. This tool helps users figure how much money their employer should withhold from their pay so they don’t have too much or too little tax withheld. The results from the calculator can also help them fill out their Form W-4. Taxpayers whose income isn’t paid evenly throughout the year, can check Publication 505 instead of the calculator.
- Have more tax withheld. Taxpayers with a regular paycheck can have more tax withheld from it. To do this, they must fill out a new Form W-4and give it to their employer. This is a good option for taxpayers who participate in a sharing economy activity as a side job or part-time business.
- Use estimated payments to pay other taxes. Self-employed individuals can make estimated tax payments to pay both income tax and self-employment tax. Self-employment tax includes Social Security and Medicare.
- Use Form W-4P. Generally, pension and annuity plans withhold tax from retirees’ payments. Recipients of these payments can adjust their withholding using Form W-4P and give it to their payer.
Self-employed taxpayers normally earn income by carrying on a trade or business. Here are six important tips from the IRS for the self-employed:
- Self-Employed Taxpayers. Sole proprietors and independent contractors are two types of self-employment. Taxes can be complex for the self-employed. Check out the IRS Self Employed Individuals Tax Center.
- Estimated Tax. Self-employed taxpayers generally need to make quarterly estimated tax payments. IRS Publication 505, Tax Withholding and Estimated Tax, has details on making those payments.
- Schedule C or C-EZ. Self-employed taxpayers must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040. For expenses less than $5,000, use Schedule C-EZ. Each form’s instructions provide the rules for which form to use.
- SE Tax. For those making a profit, self-employment and income tax may need to be paid. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax.
- Allowable Deductions. Taxpayers can deduct expenses paid to run a business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in the industry. A necessary expense is one that is helpful and proper for a trade or business.
- When to Deduct. In most cases, taxpayers can deduct expenses in the year paid or incurred. Some costs must be ‘capitalized,’ however. This means deducting the cost over a number of years.
All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
Additional IRS Resources:
IRS YouTube Videos:
The Internal Revenue Service will hold a free webinar today, Wednesday, Aug. 26 from 2 p.m. to 3 p.m. ET designed to provide basic tax information to new entrepreneurs as well as owners of existing small businesses. The title of the webinar is “Business Taxes for the Self-Employed: The Basics.”
Topics include reporting profit or loss from a small business or profession on Schedule C or Schedule C-EZ, businesses owned by married couples, deducting business expenses, and self-employment and quarterly estimated tax payments.
To register or access archived versions of past webinars, visit the Webinars for Small Businesses page. Topics of popular recent webinars have included tip income reporting, the home office deduction, and how to work effectively with a paid tax preparer.