Today’s Biz Ladies post is from Jennifer Dunn of Outright.com, the web resource for managing your business finances online. Jennifer has previously contributed a post on running your business from home when the kids are around, and today she explains the sometimes-complicated process of quarterly estimated taxes. Thanks so much for this very helpful post, Jennifer! — Stephanie
Read the full post after the jump . . .
Quarterly Estimated Taxes Explained
There’s a lot to be happy about when you’re running your own business. Making your own schedule is nice, as is not having to answer to anyone. Other perks include the creativity of making your own products and watching people make use of them.
Another side to all this freedom is the responsibility of handling certain things to which you normally aren’t exposed. For example, if you have a “regular” job, you don’t have to worry about taxes, except when they come around every April. As a freelancer, crafter, or small business owner, you must now face the dreaded “quarterly estimated taxes.”
But are they really that terrifying? We say nah, they’re just misunderstood. Quarterly estimated taxes only seem like a huge pain, but once you get the hang of them, they become just another part of your regular business life.
You may be wondering what the heck quarterly estimated taxes (QETs) are in the first place. Here it is in a nutshell: The United States has a “pay as you go” income tax system. This is why, if you’re a regular W-2 employee, you get taxes taken out of each paycheck. But if you own your own business, nobody is taking those taxes out, so you’re responsible for “paying as you go” every quarter. Plus, since you likely don’t get a regular paycheck, the IRS wouldn’t know how much to take out of your check even if you did remit taxes every week or two.
So it’s up to you to figure out exactly how much needs to be paid in every quarter, a.k.a. every few months. You may be wondering how you’re supposed to do that if you sell hundreds of items throughout the year. What, are you supposed to save every single bill of sale now?
Yes, that’s exactly it. Also, you must now save every expense receipt like gas, supplies, and whatever else you want to deduct on your taxes. It’s all up to you now, so keep it organized!
What to Do
“Hey, I thought you said this was easy! Why all this pressure?” It really is simple once you get into the rhythm of figuring out what you need to pay. The first time might be a little rough, but after that you should fall into a pattern.
We mentioned that you should keep track of all your receipts and invoices (hint: try a free Outright account to do this automatically). This is because you need to figure out how much money you’ve made so far this year . . . and predict how much you will owe in taxes. You’ll want to add up all the sales you’ve made over the year, take out all the deductions, and divide by four to get your estimated quarterly payment.
There are other ways to go about it. For instance, do you have last year’s tax return handy? You can actually pay the same amount you owed last year and be fine; this is known as the “safe harbor rule.” However, there’s one issue with this plan, as you may overpay or underpay and have to do more paperwork (and send in more money) later. Plus, who wants to overpay and have less money in hand until tax refunds come in April?
So it’s up to you. Either way, when you go to pay, just grab a copy of IRS Form 1040-ES, fill it out, and send it in with your check. You’re done, and now you can concentrate on the very next time you have to do it . . . in just a few months!
We understand this may still seem extremely confusing, which is fine. That’s why we’ve included a quarterly estimated tax calculator with every free account at Outright. It can aid you in finding your correct payment so you can concentrate on running your business and making money instead of when and where to send it to Uncle Sam!