Brad, this is the first year I’ll file taxes as a business owner and I’m hearing a lot about estimated taxes–What are they and should I be paying them?
Great question, Dan. As a new business owner, it’s understandable that you have tax questions— a lot of business owners are in the same boat.
Estimated tax is the method used to pay Social Security and Medicare taxes and income tax because you don’t have an employer withholding those taxes for you. Before you ventured into business ownership, your weekly take home pay reflected those deductions and at the end of the year, you probably filed a 1040 and maybe even got a refund from the IRS.
This all changes when you’re self-employed. If you’re filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.
If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file a return. Why? As a business owner, most of the income you make from clients and customers is not taxed, which makes you responsible for setting aside a portion of that income for taxes—many business owners just set aside 30 percent of all income received for taxes.
Whether you’re an S-corporation, partnership, sole proprietors or a C-corporation, a professional accountant can help you plan ahead and stay on track. They’ll help you keep tabs on things like net income of the entity and overlooked deductions. If this is your first year filing as a business owner, we recommend you work with a professional to establish good practices.
Ready to get serious about taxes and learn more about the things you can do to simplify the filing process? Download our guide to taxes: