A sole proprietor submits a Schedule C with their personal 1040 tax return annually. They also file Schedule SE with these returns and pay self-employment taxes quarterly.
Quarterly Tax Payments
As a self-employed individual, you generally must file an annual return and pay estimated tax quarterly to avoid penalties. Use Form 1040-ES vouchers to pay federal taxes. State forms can be obtained from your department of revenue, tax advisor, or CPA.
To avoid a large tax payment in April, set aside money monthly to submit estimated quarterly tax payments. Failing to do so could lead to IRS fees and penalties. Use your previous tax return to estimate annual income and then divide that amount into four even payments.
Record Keeping and Refunds
Keep records of payment dates and amounts, which you’ll need to file returns. Paying quarterly makes it easier to manage your tax bill than paying a lump sum, especially if you’ve underestimated what you owe.
Sole proprietors are entitled to tax refunds when the estimated tax payments made throughout the year exceed their tax liability based on the company’s overall profit and loss.
You can write off direct expenses for a vehicle that you use for your business. If you’re a writer or graphic designer, you won’t have to pay sales taxes on your services but you will owe state sole proprietorship taxes on the revenue you earn.
A sole proprietor’s best chance of getting a refund is by overpaying on quarterly estimated payments to increase the chances of receiving a refund once the return is filed.
Sole proprietors must pay Social Security and Medicare taxes, and may need to pay quarterly estimated income taxes. Sole proprietorships may take expense deductions and tax credits to reduce their business tax bills.
The business mileage deduction, at 57.5 cents per mile (in 2020), can make a sizable impact on your tax liability and is sometimes overlooked by sole proprietors.
Quarterly Tax FAQs
Why do self-employed people pay quarterly taxes?
Quarterly taxes for self-employed individuals are necessary due to the absence of an employer withholding taxes from their paycheck. The ‘safe harbor’ method can help avoid tax penalties by ensuring the correct estimated tax payments are made.
You’ll receive a notification from the IRS if you have an underpayment penalty. Avoid this by owing the IRS less than $1,000 after subtracting withholdings and credits, thus avoiding the underpayment penalty.
QuickBooks Self-Employed estimates federal tax payments based on your income, deductions, predicted future income, and tax profile.
Exemptions and Self-Employment Tax
Those who will owe $1,000 or more in taxes and had a tax liability the previous year will likely be required to file quarterly.
Self-employment tax is high because it’s the responsibility of the self-employed to track and pay it. According to the IRS, taxpayers who expect to owe more than $1,000 must make estimated tax payments four times a year.
Many self-employed people open separate bank accounts for taxes to ensure they have enough money to cover their tax obligations.
Self-employed taxpayers need to make quarterly tax payments and meet IRS deadlines, as part of their fiscal responsibilities.