Any self-employed person might be obliged to pay quarterly taxes. An individual who is self-employed can be described as one who:
- Operates as an independent contractor
- Works in a particular field or trade as a sole proprietor
- Belongs to a partnership that carries out business activities, for example a limited liability company (LLC)
- Operates a business by themselves, even if it is part-time
Denna Smith, a Seattle-based freelance writer recalls that when he first started his business, he was completely at sea when it came to quarterly taxes. But the IRS has made it extremely easy. Business owners only require to set up a system and that makes it quite convenient.
What Taxes Are Paid by Self-Employed Persons?
If you are a self-employed person, you prepare an annual tax return but normally pay estimated taxes each quarter. Quarterly taxes are normally categorized into two:
- Self-employment tax (Medicare and Social Security)
- Income tax on business profits and any other type of income
For instance in the tax year 2017, the tax rate for self employed persons earning a maximum net income of $127,200 is 15.3%. This is broken down to 2.9% Medicare tax and 12.4% Social Security
High income earners, usually people with incomes totaling $200,000 or married couples earning $250,000, are required to pay an extra 0.9% Medicare tax
If you are a business owner and you wish to compute your taxable income:
Write down your annual gross income (total revenue you earned) and subtract the expenses and any other deductions that you qualify for. For instance, if your annual revenue amounted to $100,000 and your business deductions totaled $30, 000, your taxable income works out to $70,000.
The IRS (Internal Revenue Service) provides a complete listing as well as a reference guide to assist small business owners. Form 1040-ES is an IRS worksheet that explains that calculation and assists you to establish your taxable income and the required payments.
When you work out an estimate for your annual tax obligation, divide the figure by four and submit the quarterly payments as and when they fall due. In case you experience significant variations in income or expenses in the course of the year, this can affect the amount of quarterly taxes that you require to pay.
For instance if your business loses an important customer and this causes your income to reduce, you can make appropriate adjustments to the quarterly payments.
On the other hand if you secure a major contract that raises your income, it might be wise to reevaluate the worksheet in order to make sure that you are paying the correct amounts.
How to Make Quarterly Payments
After calculating the quarterly payments, you can use the Electronic Federal Tax Payment System to make online submissions. You may also use paper forms provided by the IRS to make your payment . If you file your annual tax return during the month of April, you will need to pay the tax balance that was not covered by the quarterly payments.
You may use your adjusted total annual income to make projections for the quarterly payments for the following tax year. You can also utilize software such as Quickbooks Self Employed to monitor your income, deductions and expenses all though the year. This will assist you to estimate your quarterly payments.