Pronto Tax Class Blog
Best Ways to Avoid Self-employment Tax Penalties
By Tim Frye
When a taxpayer is self-employed they are often required to send in quarterly estimated tax payments to the IRS. The situation can become ambiguous and muddled when, as with most businesses, income vacillates from month to month or year to year. It can be difficult at the point to determine estimated tax payment amounts that will keep you out of the penalty zone. If you send to much your routine expenses will be a struggle now, but if you send too little you are going to be subjected to the estimated tax penalty on top of an already hefty tax bill. Let’s look at some of the best methods in avoiding self-employment tax penalties. After all, to run a successful business you are going to need to drop the majority of your earnings right back into the company to keep it afloat.
Base Estimated Tax Payments on Last Year’s Earnings Totals
The estimated tax penalty can be dodged by simply paying at least the same amount as the business owner paid the year prior. Using this strategy you would divide the previous year’s taxes into four equal payments and send them to the IRS by the requisite due dates. Those dates are April 15th, June 15th, September 15th and January 15th. It is important to note the taxpayer is still held liable for any remaining tax debt but at least the penalty can be avoided.
Use Separate Accounts When It Comes To Business Expenses Verses Personal Expenses
It is vital in business, especially when you are spending a lot to make your money, to demarcate your business expenses from your personal ones. Keep specific accounts set up for business purposes as to keep things clear for both you and the IRS in case they come knocking at your door. Keep all transactions in one or two bank accounts and you will find the appropriate expenses when most needed.
Overestimate Estimated Tax Payments
These estimated tax penalties can be quite hefty to business owners just trying to make in this rough in tumble corporate world. The interest is levied upon the amount you underpay from the day your quarterly payment is due until the day the debt is settled. The interest for the year 2014 is generally 3% depending on the quarter. If the first quarter of the year’s payment is under the amount set forth, you could owe a different amount then if you underpaid in the third quarter. Overestimating these payments will give you some leeway so you can make up any difference in the end. Any money overpaid is given back to you in the form of a tax refund anyhow.
The self-employed person is their own bookkeeper usually, especially when they are first starting out. So the calculation of estimated tax payments is extremely important for business owners to manage.
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