Self-employed and no clue on taxes?

Question

for 2005 taxes I received a refund becasue I worked for somebody else, but for six months I was self-employed. this year I haven't made any quartely payments yet, So, should I wait to pay until next january.

Answer 1

It depends. Just how much did you earn and how much do you think you can deduct as business expenses. Remember, being self employed means you pay both sided of the social security tax or 7.65% times 2 = 15.3% on your net income after deductions. If you didn't earn any money, well no payment is needed. But, for example, if you took home $20000 from your self employed business, you should pay at least $3000 before the end of the calendar year. To play it safe, add an extra 10% for withholding (in the $20000 case, add an extra $2000). This is a very rough estimate, but it has kept me out of trouble with the IRS. If you overpaid, you can apply the tax paid to next year or get a refund (essentially an interest free loan to Uncle Sam). If you underpaid, IRS can and will come down hard on you in the form of fines and late penalties - so pay now or PAY later. Better yet, get a reasonable accountant to help you.

Answer 2

To avoid penalties for underpayment, make quarterly payments at least up to 110% of the amount of total tax you paid last year, regardless of source.

After that, to determine if you have a huge bill to pay later on, you should try to estimate your income tax liability.

Lets assume you are a self-employed Girl Friday, who delivers packages for clients, typing at an office, and bookkeeping at home. Your clients pay you $30,000 over the course of the year for your services.

In this scenario, you do not owe tax on the entire $30,000. You drive your car for business, say 10,000 miles, entitling you to a $4,850 milage deduction. You do work at home, entitling you to a $3,000 deduction. You may also have $2,000 in telephone and cell phone calls related to your business. Perhaps, $500 in office supplies. The software you use for your bookkeeping is $100. Now that $30,000 is $19,550. This is the amount you owe tax on.

However, as you are self employed, you owe two taxes. One is Income tax, the other is Self-Employment tax. Self-employment tax is the medicare and social security tax you would pay as an employee and as an employer. This tax is 15.3%.

The Income tax can be further reduced. Assuming your are single, you have a $5,000 standard deduction and a $3,200 personal exemption. Now your taxable income is $11,350, which is taxed at 15%.

Your personal situation will be different, but you can see some of the analysis that you can go through for a quick and dirty calculation. Also be aware that your State may impose a tax.

Answer 3

Well, for one thing, you shouldn't have gone into self-employment without a business plan. Part of your business plan would have included a section on finance, taxation, and projected income and profits statements. This would have enabled you to understand what drives the market prices for your services based on not only the going market rate but also the costs of taxes, overheads, and your personal living expenses. You could have then determined what the correct price would be to set for your services.

As it is, by finding out now, you might have to raise your fees considerably to compensate for your unplanned expenses. This may be difficult with some of your existing clients. Get on track now and see an accountant to figure our your taxes so that this is no longer an unknown for you.

Answer 4

The next quarterly installment date for 2006 is January 15, 2007. You should do a run through and see if you are going to owe more than one thousand dollars in tax to uncle. If not you have no reason to file a 1040ES and make a payment. Do your math and see.

Answer 5

you could, but being a small business owner and tredding on rocky ground, you are better off paying quarterly...that will help you to avoid paying out a big chunck all at once. your best bet is to find a trusted (ask friends and family, or even someone you know that has a business) accountant and find out what they have to say.

Answer 6

No go now!!!