As a self-employed individual, you are responsible for estimating your tax payments because there isn’t an employer who takes your taxes out for you. You need to set aside the correct amount of tax that you owe the government each quarter. Determining the amount you owe is not always an easy task. An accurate tax estimate is important because it makes paying your taxes less stressful. The tips below should help you track your income and make a relatively accurate tax estimate.
Tracking Your Monthly Income and Expenses
Your quarterly payments are to be made in January, April, June and September. You must also ensure that you don’t owe the Internal Revenue Service (IRS) more than a particular amount of money at any given time; otherwise, you could receive a penalty. The best way to avoid being penalized is to track both your expenses and income every month.
Being self-employed allows you to deduct the cost of equipment and supplies that are necessary for you to work. This means that you only pay taxes on your net income, which is the income you have after you deduct your monthly expenses. By knowing your net income every month, you will be able to determine how much money you need to set aside for taxes.
Calculating Your Tax Rate
Once you determine your net income, you need to look at your tax rate from the previous year. By setting aside that percentage and just a little bit more, you should be close to the amount of tax you need to pay.
Because you are self-employed, an employer is not deducting money from your wage to go toward your Social Security or Medicare. This must also be factored into your calculations. A good practice is to check your calculations and tax payments at the end of each year to ensure you have paid enough. Doing this helps you quite a bit because it gives you an opportunity to make another payment before the January deadline, if necessary.
Making Your Payments
You may choose to make quarterly payments. If you want to make things simpler, you can just pay your taxes every month. By doing this, it is just as if you are paying another monthly bill. As long as you are accurate in your calculations, you should have no problem calculating your estimated tax bill.
If you need assistance with anything related to your taxes, including determining your tax estimate, please contact Advanced Tax Solutions today. Our tax professionals are dedicated to helping you with all your tax needs.