Understanding Tax Estimation
No one enjoys paying taxes at tax time, and the thought of paying taxes in advance is even worse. But, the real truth is that savvy business managers and investors are required to make allowances for taxes from the very beginning of the year. While the typical worker who is a company employee will have money withheld from their earnings throughout the year, then receiving a W-2 form at the end of the year stating how much money they have contributed toward their tax obligations, business operators and investors will allow for taxes first. Individuals or married couples who work regular jobs and operate side businesses have a tax concern as well. Married couples may actually want to file separately, or at least separate from the business. Taxpayers with investments who receive dividends each quarter will also often pay additional estimated taxes as the year progresses. And of course, most small business taxes are filed every three months. Everyone should give their tax burden some forethought, and especially those who are self-employed and have a considerable income.
Deciding on an Estimated Contribution
All taxpayers and small businesses need to estimate first how much money they expect to receive in annual income and then calculate their small business estimated taxes. Married couples may need to evaluate their filing status as well, as there could be benefits to filing either jointly or separately. This will depend on the individual situation. Some self-employed people who run businesses actually pay themselves just as any other worker and make their personal tax contributions in the traditional tax deduction format. Other self-employed individuals will opt to keep what they earn and pay taxes quarterly, while others may pay in small business estimated taxes during the year to their IRS account and then file annually. And of course, there are still those who wait until the end of the year and file traditionally, taking the hit for the extra tax obligations at the end of the year. The problem for these individuals is that they may be required to pay an underpayment penalty for failing to meet their obligations throughout the year, which can be avoided by making estimated tax payments during the year. This is actually a requirement for those who expect their tax debt to be in excess of $1000 for the year.
Percentages and Amounts to Avoid a Penalty
A good general rule for many taxpayers is estimating tax requirements in $1000 increments using a 90% rule regarding tax obligations. Those who expect their tax deductions to be within 90% of their total annual tax debt will often choose to pay extra at the end of the year, and those who pay each quarter could opt to pay an additional amount with their regular tax payments. Individuals with significant wealth will have the means to pay the entire tax bill annually, but this would also mean they could still pay estimated amounts in advance to avoid any subsequent penalty. It is not uncommon for a business of significant size to calculate their annual taxes going forward at the beginning of the year as a necessary business expense and then look for strategies to reduce the tax burden during the year. Annual tax returns can apply to businesses as well as individual workers, and they will assuredly be paid when small business taxes are not questioned when appropriately filed.
Any taxpayer who works a regular job and operates a side business always has the option of requesting additional tax deductions be withheld from their regular earnings. Most employers have no problem with this choice, as they are not required to match deductions as in Social Security tax obligations. This works well for those who will have a small tax obligation from their personal business operation and have a significant income from regular employment. And it is an easy method of ensuring there are adequate resources already in place when the final tax burden is calculated. This clearly depends on the individual situation. However, it is always best to be “better safe than sorry” when dealing with the Internal Revenue Service. The IRS may want to present a more amiable attitude towards taxpayers, but make no mistake about the fact that agents are very serious about collecting the government’s share, whether it be fair or not. It is always best to be prepared beforehand, and sometimes required by law.Disclaimer: This is intended to provide useful tips and is NOT intended to be legal advice. You should always seek the advice of an attorney when creating a will. You can also get more information about creating a will by contacting one of the attorneys at Brunsdon Law Firm.