how do i know if i should put exempt on my w2 at work?

Question

i just started my own small business, i was told that small business owners pay taxes at the end of the year instead of having the deducted every pay period. well, i start work monday and some fellow business owners told me that they claim anywhere from 6-9 exemptions on their w2 at work some even exempt..how do i know what i should claim?

Answer 1

You can only claim exempt on your W-4 (not W-2) under the following conditions:
1. You had no tax liability in the prior year.
2. You expect liability in the current year.

http://www.irs.gov/pub/irs-pdf/fw4.pdf?portlet=3

Read the form W-4 in the above link.

You were also incorrectly informed that small business owners pay tax at the end of the year. Small business owners pay taxes quarterly. Payments are due on estimated earnings on: April 15, June 15, September 15 and January 15 of the following year.

Answer 2

You're saying you have a job and also your business?

If you had any tax liability last year (you didn't get back everything that was withheld) you can NOT legally claim exempt.

If you expect to have any tax liability THIS year you can't claim exempt. If you expect to make $400 or more from your business you will have tax liability for self-employment tax, so do NOT claim exempt at your job.

Unless these other business owners have very little income from their business, and have a large family of kids under 17 or huge itemized deductions, or are fairly low income and have kids so they can get a large Earned Income Credit, they are probably looking for trouble by claiming a large number of allowances at their jobs. Unless your business is losing money, the business income INCREASES your taxes, doesn't DECREASE them.

Answer 3

Be careful about free advice, even mine. If you underpay by too much, the IRS will assess penalties as well as the tax owed, and it can get ugly. I would go easy on the exemptions, unless you are giving away money.

If your business is going to make any serious money next year, you might want to make quarterly tax payments and avoid the lump sum at the end. The IRS has several free publications for new business owners. They would not tell you the best ways to avoid paying more taxes, but they'll tell you what's legal.