What are tax estimates?

Congrats on being your own boss!! I’m sure you’re killing it and enjoying your newfound freedoms! Or maybe you’re finally looking taking that leap of faith? We are living in the best time to go for it! The government even applauds your success—where’s their piece of the pie though? One of things I’ve noticed that confuses some business owners are tax estimates. What is it and why on earth do I have to pay it? Shouldn’t I just wait until tax season and pay what I owe all at once??

The best comparison is to your monthly bills. It’s due when they say it’s due or else you get to give extra money in the form of glorious late fees. Who cares right? I’m sure we all love the idea of giving money away for absolutely no reason… Comparatively, income tax is due after you’ve made a profit generally. If you choose to pay it late, you’ll have late fees. Seeing as no one like to pay taxes in the first place, what we really want to avoid is paying even more money for absolutely no reason!

Anyways, the government does not like to wait for you to pay your bill. When you make the money, they want the tax on it. As a W-2 employee, that wasn’t really an issue. Just filled out a form to have some taxes withheld as the money was made. Entrepreneurs do not get the luxury of having their minimum required tax bill taken out of their paycheck as they earn it. It’s up to you.

How much should I pay?

My first suggestion is always going to be to get a good accountant. If you let your accountant figure out how much you need to pay every quarter, less figuring on your end. This also means less extreme over or underpaying in taxes. However, if you’re just starting out and can’t quite afford an accountant yet, my suggestion is that you pretend about 30 percent of your profits don’t exist. Note that I said you’re profits, not your gross revenue. However, seriously, POOF, consider it gone. Here’s why:

“The law sets the self-employment tax rate as a percentage of your net earnings from self-employment. This rate consists of 12.4% for social security and 2.9% for Medicare taxes.”-IRS.org

There goes 15.3% of your profits. The remaining 14.7% is the general safety net for your federal and state taxes. However, if you’d like a more detailed calc of your federal estimates, still done all by yourself, I suggest that you go to the IRS.gov and look at 1040-ES instructions. It’s super detailed and can help you basically step by step if you have the time and patience.

When is my bill due?

Estimates are due on a quarterly basis. The due dates are 4/15, 7/15, 10/15, and 1/15. These for the first, second, third and fourth quarters respectively. I suggest you use the IRS.gov/payments to pay online. If you’d like to mail in a check, where you should send it depends on your state of residency.

There’s the gist of self employment tax and tax estimates for the entrepreneur. May you never ever end up late on your bill.

See you next time Boss