Getting a Grip On Your Quarterly Tax Payments!
In the changing face of small business today, a lot of freelancers and “side gig” entrepreneurs can get tripped up by the tax implications of their business. Whether you just opened the doors on your new firm or you’re an independent contractor, the IRS actually has made it easy to make sure that you don’t get behind on taxes.
To put it simply, if you are self-employed, you should plan on paying your taxes quarterly. Of course, “self-employment” means a lot of different things to different people, so let’s start by defining – per the IRS – what “self-employment” really means:
A self-employed person is someone who:
- Is an independent contractor
- Works in a trade or field as a sole proprietor
- Is a member of a partnership that conducts business, such as an LLC
- Runs a business on their own, including a part-time business
With that in mind, there are some important considerations that any self-employed person needs to account for. For starters, no matter how small your company, you’ll need to understand that throughout the year, you won’t be paying taxes on your income as you would if you were employed by someone else. THAT’S the problem and why the IRS strongly recommends Quarterly Tax Payments – it’s easier to write four small checks than one big one!
Form 1040 Estimated Individual Tax(ES)
The most common form that self employed people will use for tax filings is Form 1040ES. This represents a big change for many people, as Form 1040ES is due each quarter and is based on taxation from the previous year. In our experience, when small business owners look at quarterly tax payments the same way that W2 earners do – as a proactive payment during the year with a refund after the year ends, the perceived pain of paying taxes lessens a great deal.
So who needs to file a 1040ES? The IRS recommends that any individual expecting to owe more than $1,000 in taxes, but who does not have payment for those taxes withheld, to file the form. Filing it and making payments may prevent penalties and interest from being assessed against the taxpayer and this extends to U.S. citizens, resident aliens, non-resident aliens or residents of U.S. holdings such as Guam and Puerto Rico can use the form.
How About Filing Forms 940 and 941?
As a small business owner, if you have employees, then quarterly tax payments can be a little more involved. Form 941 is the quarterly accounting for all the withholding amounts for employees of your company – federal income taxes, FICA, and employer payments – along with the amounts due to the IRS. Essentially, all the “stuff” that you’d see on an employee paycheck is included on this form from the company.
Form 940 is the Annual Federal Unemployment (FUTA) Tax Return for businesses – again – if you have employees, this will be a major part of your company’s tax responsibility. Essentially, you're subject to FUTA tax on the wages you pay employees who aren't household or agricultural employees and must file Form 940.pdf, Employer's Annual Federal Unemployment (FUTA) Tax Return, for 2017 if:
- You paid wages of $1,500 or more to employees in any calendar quarter during 2016 or 2017, or
- You had one or more employees for at least some part of a day in any 20 or more different weeks in 2016 or 20 or more different weeks in 2017. Count all full-time, part-time, and temporary employees. However, if your business is a partnership, don't count its partners.
The good news is that these forms can be as easy or as hard as you want them to be – just like any part of the taxation process. Great bookkeeping, clear accounting, and financial integrity won’t make taxes easier to understand, but it will limit the amount of time – and potentially money – that it takes to get your company return filed.
Speaking of money, there’s a secret to avoiding paying penalties to the IRS, too. It starts with clear systems and processes in your own company but it really shines when you take the time to understand that your company will have some tax liability each year – it’s the cost of doing business. When you organize your business to pay taxes as they are due – that is to say – every quarter, you take what can be a scary process and break it down into a organized painless and simple system to understand.
By: Chris Groote
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