If you organize your business as a single owner LLC or elect to have your multi owner LLC taxed as a partnership, you will have to pay estimated quarterly taxes to the IRS after your first year of business. If you are earning a substantial profit during your first year, you may want to go ahead and begin paying quarterly taxes immediately so that you are not hit with an outrageous bill come tax time. Paying quarterly taxes is the scourge of self employment it can be difficult to write a check every three months for 15.3 of your income. In reality you are just covering what is usually paid through withholding and the employer s share, and paying once per quarter saves you from having to file and pay more frequently.
IRS Form 1040ES is used to calculate and file your estimated quarterly taxes. To estimate your payment, you must calculate your expected adjusted gross income, taxable income, taxes, deductions and credits for the year. If your income is on par for last year, it may be easier to use last year s return as a starting point for estimating your tax bill. If your initial estimate is too high or too low, Form 1040ES includes a simple worksheet to help you recalculate your estimated tax each quarter.
The key to paying estimated taxes is to be sure you pay the right amount and that you pay on time. The IRS has set due dates for estimated tax payments, and if you are late they will slap a penalty on you. And, if you underestimate for the year, the penalty will be assessed when you complete your annual income taxes. The IRS tend to be sticklers about these quarterly payments, so plan ahead and be sure the due dates are prominently displayed on your calendar. If a quarterly payment is late, you will be penalized even if you are due a refund at the end of the year. Just don t be late.
It is strongly recommended that you set aside a consistent percentage of your payments and distributions as you receive them. The quarterly payments can seem like a big hit if you don t plan ahead. However, if you have trouble saving your cash, you also have the option of submitting payments monthly, or even weekly, as long as the total for the quarter is correct.
The IRS encourages you to use the Electronic Federal Tax Payment System (EFTPS) for your periodic tax payments. The system is secure and easy to use. It allows you to schedule payments up to a full year ahead (for individuals)...a great feature to ensure you aren t late. However, make sure the correct amount is available in your account on the due date. One good way to do this is to open a separate bank account to hold your tax money. Transfer the estimated percentage each time you get paid and you won t have any problems. The EFTPS also allows you to check your payment history, a very helpful tool at annual tax time.
Handling the tax burden of self employment is a major concern for many first time entrepreneurs. In reality, once you have established a system for dealing with what you owe, it requires only a few hours at most per quarter to stay on top of the process. Like most other aspects of business startup, the key to success is to learn the process and plan the work, and taking care of Uncle Sam is no different.
Author Resource:
K. MacKillop, an entrepreneur with a J.D. from Duke, is co-founder of LaunchX LLC and authors a business startup blog. The LaunchX System, a five Unit series of step-by-step business startup procedures, key software and more answers the question, "Where do I start?" Visit http://www.LaunchX.com .
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