Small business owners or partners in a business are required to pay taxes on their business income. Called estimated taxes, these are paid when you pay personal taxes in a process called pass through taxation.
Business owners and those who are self-employed do not pay any withholding taxes from their own business income, unlike employees where they have payroll tax deductions for taxes due on their income. If payments are not done through withholding, then business owners and self-employed individuals must pay the quarterly estimated taxes.
They are also required to pay Social Security and Medicare taxes on their business income which are called self employment taxes. Both income taxes and self employment taxes on business income generated by a business owner must be paid on his or her personal tax return.
How to Calculate Your Estimated Taxes
The general rule is that a business owner must pay at least 90% of income and self employment taxes during the year to avoid penalties. You need to b combine business income with other information on other income, tax withholding, credits and deductions on the personal tax return. Add this to your calculated self employment tax to determine estimated taxes due. This is the breakdown of the information needed to determine your estimated business tax:
--estimate of your business income for the tax
-- estimate of business expenses for the year using as guidelines either the expenses of the previous year or year-to-date expenses
--include personal income, credits, deductions, exemptions and any withholding of federal income taxes from personal income. You can use as guidelines either information from the previous years' tax returns or year-to-date and project to the end of the year.
While you can do your estimates yourself, you can also request your tax preparer to do an estimate for you using an IRS estimated tax collection worksheet in the IRS website. You can download straight from the website and fill it up on online.
You can also get an estimate by looking at your return for the previous year and basing your estimates on the information given. Any generic tax collection software can help you do this. You simply put in an estimate of business income and the software then calculates your self employment taxes. This may not provide a totally accurate figure but you can get a rough estimate that you can use for tax planning.
Estimated Taxes for Partnerships, LLC's and Corporations
Those who are partners or owners of shares in corporations who periodically receive income from the business are required to pay estimated taxes if they expect to owe $500 when they file. The process above applies to these cases as well.
It is important to note that each business situation is different so you may need to work with a professional tax and accounting expert to determine the best calculation method that applies to you. Get in touch with us at https://omnifidelity.com to get professional help in calculating your estimated taxes and ensure that your business taxes are filed accurately and on time.
Omni Fidelity Associates