Construction Laborer

IRS Publication 505: Estimated Tax

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.

 

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The Personal Tax Exemption

A tax exemption is a gift from the IRS…it’s chunks of your income on which you won’t have to pay any federal income tax.  There are a few reasons for this, but the most common is the personal tax exemption. That’s because every taxpayer gets it!  It’s just a certain amount of money which we all get to earn that’s not taxed.

If you are married, you also get a personal tax exemption for your spouse if you are filing jointly.  Also, if you claim any dependents then you get personal tax exemptions for each dependent as well.

If you make too much money, however, the personal tax exemption gets phased out, the more you make.  For 2013 the personal exemption phaseout starts at an income of $250,000.  It’s completely gone if you make $372,500.  So, between a quarter of a million dollars and $372,500 you get a partial personal exemption.  That’s the nature of a phaseout.

If you are non-resident alien you can claim the personal exemption but not the spouse and dependent exemptions.  However, if you are a on-resident alien and you’re married to a U.S. citizen or a resident alien then you may claim these personal exemptions if you have chosen to be treated as a resident of the U.S.

The Personal Tax Exemption & Your W4 Form

The W4 Form is where you claim your personal exemption.  The personal exemption amount changes each year to keep up with inflation.  The W4 is also where you would claim other allowances, like dependents.  This will cause your employer to withhold less money from your future paychecks.  If, when figuring your federal income taxes at the end of the year it turns out that you claimed too many allowances then you will just end up paying back the money that you received in your paycheck that should have been withheld.

For more on tax withholding visit the IRS website here.