For a variety of small business owners, the reality is that they are self-employed and running their business without any employees. This could be done to keep costs down, but could also be used to reduce the costs associated with payroll and payroll taxes. Yet, even if you do not hire anyone else to assist you in running your business, the reality is that you are an employee of your own business. Based on how you choose to run your business, you can then determine the kind of payroll obligations that you may have as a result.
For example, if you run your business as a corporation, then the payroll obligations would be the same as if you hired another employee. Why would this be the case? Because a corporation is a separate and distinct legal entity. Thus, you will have to pay the payroll taxes for your own paycheck. If you don’t incorporate, then you may not have traditional payroll obligations. But you have some obligations that are very similar, as we will see.
Quarterly Estimated Tax Payments
The reality is that if you are taking income from your business, then you will need to make sure that you are making income tax payments on a quarterly basis. The reason is that income tax needs to be paid as income is earned. When you are employed through a traditional employer, they handle deducting those taxes from your check and submitting them before you even get your check.
Owning your business, however, puts you in the place of the employer. This means that you will need to make sure that those payments are being made. You should also make sure that you can document all those payments, in case the IRS has any questions or does not properly credit you for those payments.
Self-Employment Taxes
Now we are getting to the taxes that pop for the self-employed the most often, which is the self-employment tax. This tax encompasses the Social Security tax and the two Medicare taxes that employers typically deduct from an employee’s check. Keep in mind, traditionally, you would only be responsible for half and the employer would be responsible for the other half. When you are self-employed or a small business owner, then you will find that you are responsible for the whole amount. However, you can deduct the employer obligation on your taxes for the year that it was paid.
Therefore, you want to be sure that you are completing your filings on a quarterly basis to determine how much you owe to the IRS for these obligations. Once you have your estimated payment, it is important to make sure that they are completed in a timely fashion. If that is not done, you could be subject to penalties for late payments and/or late filings. These penalties can also include fines and interest.
Fines, penalties and interest can quickly rack up with the IRS, so your recordkeeping needs to be up to date. Keep all copies of any payments made to make sure that your social security number has been credited properly when you file your tax return for the year in question.
Lowering Your Tax Obligation
Since every small business owner is looking for ways to lower their tax liability, it is important to note some key ways to do so, especially for those who are self-employed. The first way is to make your annual maximum contribution to your retirement account. Doing so will help to reduce your taxable income and thus reduce your tax liability. Other options and deductions might be available to you. To determine what your business may qualify for, it is important to work with your accountant or bookkeeper to determine the best way to reduce your business income and tax liability.
For those who are looking to determine how much they may owe the IRS, it is important to use the SE form to calculate the amounts that you should be paying. By using this form and working with your accountant, you can make sure that you are meeting all of your tax obligations throughout the year. This will help you to limit the number of penalties, fines and interest that you would have to pay if you do not make accurate payments.
Another point is to work with your accountant to institute other tax savings measures, especially if you are self-employed. By doing so, you may be able to reduce your tax obligations even further.
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