How can you estimate your tax return
Paying Those Irritating Estimated Quarterly Taxes
The IRS gods decree that if you are self-employed, you've got to pay estimated taxes.
They call it "pay-as-you-go" tax. Which means the IRS (and their state revenue department counterparts) want you to fork over their share of your profit on a regular basis -- four times a year in equal installments.
SPECIAL NOTE: Now you bypass the hassle of these deadlines by using a convenient new free service from the U.S. Department of Treasury; it's EFTPS (Electronic Federal Tax Payment System) which lets you transfer funds automatically and schedule payment dates IN ADVANCE. To receive your secure PIN -- SIGN UP for EFTPS NOW.
All of us self-employed folks have memorized those annoying deadlines for every quarter of the calendar year:
April 15 (This one's the worst because it's due for your NEXT year same date as the balance is due for your LAST year!)
June 15 (Also daunting because you've hardly had time to recover from April's double whammy)
September 15. and
January 15 (With this payment, your total paid should by now equal the annual total required, as explained below.)
Note: Sometimes you get an extra day or two if one of these dates falls on a holiday, as is often the case in January with Martin Luther King Day on January 15.
Although you're tempted to just ignore these inconvenient estimated tax deadlines, don't. Not only does the IRS threaten penalties which could throw you into a financial hole fast. But also you could also come up seriously short-handed when it's time to even the $ score with the IRS every April.
Check with your CPA to determine how this will play out for your own situation. If your previous year's tax return showed less than $1,000 tax due or a refund, you aren't required by the IRS to pay the quarterly estimates. However, if your current year is chugging along more profitably, you may want to go ahead and "pay-as-you-go" so you won't have to cough up a huge balloon payment when you turn in your next annual tax return.
How to Get the Forms You'll Need to Pay Up
To pay your federal estimated taxes, you need IRS Form 1040-ES. which contains instructions and four numbered vouchers for you to send in with your moola. If you paid estimated taxes last year, you should've received this form via snail mail -- all preprinted with your name and vitals.
But, if you didn't receive the form or you're a first-year biz owner, you can get your copy one of these ways:
• Download it from the IRS website. To do this, go to the IRS site and search under "Forms and publications" for "1040 ES."
• Call 800-TAX-FORM (800-829-3676). They have friendly humans ready to take your order weekdays 7a-11p Eastern time and Saturdays 6a-2p ET. It may take 2 weeks to receive your order.
• Stop by your friendly local IRS office (if you have one)
Tip: It's a good idea to use the preprinted return address envelopes that come in the form's packet. If you use your own envelopes, make sure you use the address listed in the instructions. Your federal estimated income taxes may not go to the same place as your personal income tax payments.
Now I Got the Dang Form, How Much Do I Gotta Pay?
To avoid underpayment penalties, you pay, at a minimum, the smaller of:
• 90% of
the tax to be shown on your next year's return or
• 100% of the tax shown on your last year's tax return, if that return covered all 12 months of the year. (Your CPA may suggest you pay 100% of your prior tax total plus one dollar, just to help keep the red flags away.)
• Or, if your prior adjusted gross income exceeded $75,000 on your individual return, or $150,000 with your spouse, you must pay 110% of your prior year's tax!
How do you know how much tax to pay before you've wrapped up the whole year and figured it out?
• Get your accountant to do this for you. Our recommendation, because she'll know things you and we don't and will be able to show you how to legally minimize the tax bite and avoid penalties.
• Or use the worksheet that comes with the 1040-ES form. (But beware, in order to do so, you'll have to make a calculation or a very good guess of your anticipated business income this year -- how's your crystal ball?)
• Or, in your four equal payments, simply pay 100% of the total federal taxes you paid last year, or 110% if you're making the bigger bucks.
• If you're a first-year biz owner in doubt about how to handle this, you can use your last year's tax return as a basis for calculating your estimated federal tax payments. If that seems like too much tax -- since last year you had a job -- but this year your startup isn't generating the same level of income yet, talk to your accountant.
For example: Lily Mae Lipstick, a self-employed cosmetic consultant, earned $23,000 net profit last year and paid a total $6,000 in income and self-employment tax to Uncle Sam. This year, if Lily pays $1,500 estimated tax on each of the four due dates (April 15, June 15, September 15 and January 15), she'll be smelling pretty since she'll have paid 100% of her previous year's total federal tax liability. Get it?
What about penalties?
The IRS likes to get their money, and figures it's your fault if they don't. So if you're late or don't pay enough, they'll make you pay more. Whew! To avoid this added grief, get your CPA's help. Or, if you insist on trying to make sense of it yourself (although "make sense" is a contradiction in terms when it comes to this stuff), ask the IRS for Publication 505, Tax Withholding and Estimated Tax.
Pub 505 is a hefty 55-page pdf, but you can start on page 17. It does give many examples of how to estimate your tax and penalties. However, when you glance at it, you'll see why we recommended you have your accountant figure this for you.
If you just want to know if you might owe a penalty for underpayment, just get IRS Form 2210, Underpayment of Estimated Tax. It's a quick four pages with some quick computations -- definitely less daunting than Pub 505 .
The IRS Isn't Alone!
Don't forget that your friendly state revenue office will most likely be looking forward to their quarterly estimated income tax payments as well -- and on the same dates as the IRS. You don't want to get on their bad side either, so be sure to check with your state's revenue or tax department lickety split and get the low down on how to make your state revenue department happy.Source: www.businessownersideacafe.com