Individuals who are sole proprietors, partners, or members of an LLC compensate themselves by taking a “draw” out of their business. The draw is your income from self-employment, and has no taxes deducted by the company. Individuals must pay Estimated Taxes personally on any income over $399 not subject to withholding. The federal government has a “pay-as-you-go” policy, and Estimated Taxes must be submitted on a quarterly basis. Included in Estimated Taxes are both income tax and self-employment (SE) tax (Social Security and Medicaid). If you do not submit enough tax to the IRS by the due date of each payment period, you may be charged penalty and interest, regardless of whether you owe tax at the end of the year.
The amount of estimated tax to deposit each quarter is usually based on an individual’s earnings for the previous year. As a new business, you probably had no previous self-employment earnings. There are; however, some rules that can help you determine whether you should be making quarterly Estimated Tax payments. Generally, you have to pay estimated tax if you expect to owe at least $1,000 in tax, after subtracting your withholding and tax credits or if you anticipate that the amounts that are being withheld for you are less than 100% of the total tax paid on your previous year’s return. If you or your spouse receives wages from another business, then you can avoid paying estimated taxes by asking your employer to deduct more tax from your earnings. To do this, you must file a new Form W-4 with your employer. There is a special line on that form where you can enter the additional amount you want your employer to withhold. If you had no tax liability last year, you do not have to pay estimated taxes this year. Beware; however, even if you are not required to pay Estimated Taxes quarterly on earnings from your new business, you may owe some taxes at the end of the year.
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