Paying out at Tax Time
Quarterly Payments Help Professionals Avoid the Crunch
It's tax time, and for the self employed it means paying out. Waiting until the year's end puts real pressure on work at home budgets. Learn how quarterly payments help.
Paying out a tax time? It’s the bane of many self employed professionals, but it’s also the reality entrepreneurs have to face. Use quarterly or even monthly payments to avoid the financial end-of-year crunch.
Paying Taxes
Everyone pays taxes (or they’re supposed to), and it’s one of those things which can’t possibly be avoided. Professionals who work at home, are self employed, own a home-based business (or rented properties), and others (such as independent contractors and subcontractors) earn income which does not have taxes automatically deducted. Work for an employer at a company, receive a paycheck, and these taxes are taken out all on their own with no work involved. Work for yourself, and there’s all sorts of extra tax problems. Everyone has to pay taxes…but not everyone pays theirs at the same time. This is where annual, quarterly and monthly tax payments come in.
Avoid the Financial Crunch
Technically, everyone in the United States has to file taxes by April 15 of every year. This goes for all professionals, even those who are not following the path of self employment. The big difference between the self employed and other types of professionals is that those who receive traditional paychecks may usually expect returns. The self employed can expect to owe taxes on all the income they’ve collected throughout the year. Anyone who earns income has to claim this with the government, then forfeit some of these funds for taxes. In self employment, paying these taxes annually can really add up to some big headaches.
Instead of absorbing a big year-end tax burden, consider making smaller tax payments throughout the fiscal year. Paying taxes every month or every three months really adds up, alleviating the monies paid when the final tax deadline looms.
Making Quarterly and Monthly Tax Payments
First, grab last year’s income tax paperwork. Form 1040 shows total tax and withholding (lines 62 and 63 respectively). Subtract the withholding from the total to discover tax liability. This is the amount owed. To make quarterly payments toward this figure, simply divide by four to see what payments should be made every three months. The same math works for monthly payments; simply divide the tax liability by twelve. The 15th of the month is when these payments are due, be they monthly, quarterly (April, June, September, January) or annually (April). Making smaller payments lessens the financial burden, and helps tax time become a bit more bearable.
A New Wrinkle: The Self Employment Tax
Self employed? There’s a little extra paying out for these professionals to do at tax time. The self employment tax must be paid in addition to income taxes. The rate for this tax is 15.3%, a rate which must be added to each professional’s average tax rate. Find the average tax rate by dividing income tax by adjusted gross income (which can also be found on form 1040). Multiply the tax rate by the quarterly net profit (after-income tax profit). This offers an estimate of how much self employment tax to pay.
