If you are in business for yourself then you should learn about estimated tax immediately. Since you are your own boss, there is nobody cutting you a paycheck. Usually if you work for someone else then whoever cuts the paychecks is responsible for taking some out of each check to send to the IRS. This covers your Social Security and Medicare tax. If too much is taken out, you’ll get it back when you file your federal income tax return, in the form of an IRS refund. If not enough is taken out then you’ll owe more when you file your tax return.
But as a self-employed person there’s nobody performing any withholding at all on your paycheck. You are the one who is supposed to know what’s going on, and make estimated payments to the IRS every three months. To do this, learn all about estimated payments in IRS Publication 505, called Tax Withholding & Estimated Tax.
What You Need to Know About Estimated Tax
The publication is 65 pages long, which indicated immediately that tax withholding and/or estimated tax is something the IRS takes very seriously. But what if it’s your first year turning a profit at your own business, after years of having nothing left over after the bills? What if, suddenly you’re raking it in, and at the end of the year you report a huge profit on your business? You’ll discover that after completing your income tax return you’ll owe quite a bit on the income you suddenly made. You really should have been paying the IRS your quarterly estimated tax payments all year long, or at least beginning when you started bringing in tons of profit.
Will the IRS get you for not making estimated payments when last year you did so horribly that you didn’t owe any taxes? The answer is no: if you didn’t owe any taxes last year, then you are off the hook this year for making estimated payments to the IRS. You can just catch up when you file your income tax return after January 1 of the next year. But based on your tax return for this year that you did so well, you’ll definitely be making estimated payments next year!
For a look at the complete version of IRS Publication 505, click here and you’ll be taken to the IRS website.