If you have recently started a business you may be wondering what you need to know about paying estimated taxes. Read below to learn when to start worrying about them and when they are due.
Most of us are familiar with how tax withholding works when we are an employee. We get a paycheck, the employer withholds some money, we get what is left. When we file our year-end tax return we either get a refund if too much money was taken from our paycheck or we owe extra tax if not enough was withheld.
When we are self-employed it is a similar process. Unlike an employee though, we are responsible for calculating how much tax to pay in and making the actual payment too. The rest is the same. We still file a tax return at year end to see if we paid too little or too much.
Our total tax liability represents the amount paid in during the year PLUS the amount we owe at year-end on our tax return or MINUS the refund. Consider this example:
$5,600 tax paid in during the year
+$1,000 tax due with the April 15 tax return
=$6,600 total tax
If the taxpayer had paid $5,600 in tax during the year and then received a $500 refund, their total tax would be $5,100. It means they really owed $5,100 and because they paid $5,600 they got $500 back from the government.
Many mistakenly believe that if you start a new business you do not need to make any estimated tax payments the first year. This is not necessarily accurate. You may owe estimated tax the first year in business if you owed tax in the prior year from any source.
If you have switched from a job to self-employment, and you expect to make about the same…
