At the best of times owning your own business is challenging. When it comes time to figure out how much to withhold from your income for what are usually automatic deductions (e.g., federal income tax, social security, medicare), running a business can be downright aggravating.
Don’t despair—there are plenty of resources out there for you, the small business owner here in Utah. As you probably already know, the type of business you own determines which income tax return form you have to use and which taxes you have to pay. You can visit the IRS’s Business Structures page to get more information on each type of business and what forms to file.
Really briefly, I want to touch on one important point: paying estimated tax. Oftentimes, you can just pay your taxes at the end of the year, but if you meet certain criteria you will need to pay taxes once a quarter to prevent paying a penalty. You must pay estimated taxes each quarter if you
- Expect to owe at least $1,000 in tax for 2012
- Expect your withholding and refundable credits to be less than the smaller of
- 90% of the tax to be shown on your 2012 tax
- 100% of the tax shown on your 2011 tax return
It’s not quite as simple as that, the percentages are different for farmers, fishermen, and higher income taxpayers, but this gives you a basic idea.
It is important to pay estimated taxes to avoid penalties. Note that even if you are due a refund at the end of the year, you may still have to pay a penalty if you did not pay enough estimated tax by each quarterly due date (that is, of course, if you fall in the category of people who must pay estimated taxes).
To really be sure about whether you need to pay estimated taxes, check out Publication 505 put out by the IRS. You can find it here: http://www.irs.gov/publications/p505/ch02.html#d0e6371
How to figure your estimated tax
Use your tax information from last year to determine your estimated taxes. You’ll also want to have the following numbers ready:
- Your expected adjusted gross income
- Your taxable income
- Your taxes
- Your deductions
- Your credits
Click here to use form 1040-ES to determine your estimated tax. If it turns out you overestimated your income for a quarter or vice versa (and therefore are paying too much or too little on your estimated taxes), simply complete another 1040-ES worksheet to get your new estimated tax for the next quarter. Again, you want to estimate your income as closely as you can to avoid penalties.
You’ll be happy to know that there are also many methods for paying your estimated taxes including using the Electronic Federal Tax Payment System (EFTPS).
For more information on withholding taxes from your own income or any tax, payroll, bookkeeping, or human resource management for your small business leave us a comment or find us at http://www.qualitypayroll.net/html/services.html.