Key insights
- The article explains self-employment tax obligations for freelancers and small business owners, including estimated tax payments, deadlines, and potential penalties. While important for individuals, it has a slightly negative influence on the US market as it highlights the tax burden on small businesses, potentially impacting investment and growth.
Host of The Big Idea, Elizabeth Gore unpacks the basics of self-employment tax from the 15.3% rate to who’s required to file and how it’s reported. Gore also explains key details like Schedule SE, deductions, and when quarterly estimated payments come into play, giving entrepreneurs a straightforward roadmap to manage their tax obligations with confidence
Welcome back to the big idea presented by Block advisors built by H&R Block.
With tax season in full swing, I want to take a second to break down estimated tax payments for small business owners.
As a small business owner, you likely will not have income tax and other payroll taxes withheld from your earnings like an employee would.
That's where estimated tax payments come in.
They are designed to make sure you are paying taxes periodically during the year instead of all at once cuz that's too much.
Most small business owners use form 1040 ES to figure out their estimated payments. The good news is, you can submit all of that online.
These payments typically cover income tax and self-employed tax.
Self-employment taxes are basically your social security and Medicare contributions similar to what employees have withheld from their wages.
So, when are you required to make these payments?
Generally, you'll need to if you expect to owe a thousand or more in taxes.
Now, that's income tax plus self-employment tax.
And your withholding doesn't cover 90% of this year's tax or 100% of last year's tax.
It's also important to consider all your sources of income when estimating how much you'll owe.
Estimated payments are due on a quarterly schedule.
April 15th for Q1, June 15th for Q2, September 15th for Q3, and don't forget January 15th of the following year for Q4.
Making these payments on time is really important y'all because there's a penalty for missing them.
It's not a flat fee like many payments you might be used to, but it's calculated for each quarter you miss. so put it on your calendar.
The IRS determines that penalty by taking the federal short-term rate for the quarter you missed and adding 3%.
One last thing now, if your business is taxed as a C corporation, the rules are a little different.
The corporation itself pays income tax and has to make its own estimated payments.
So, make sure you understand the requirements for your business type.