Posts Tagged ‘Tax’

How to Calculate and Make Estimated Tax Payments

Monday, March 26th, 2012

Calculate and Pay Estimated Taxby Caron Beesley, Community Moderator, SBA.GOV

As a new business owner, understanding your tax obligations is critical and one of the first requirements you’ll need to understand are estimated tax payments.

What are estimated taxes? Who must pay them and how? Below are some facts from the IRS Estimated Tax Guide to help new small business owners understand their estimated tax obligations.

What Are Estimated Taxes?

The IRS and your state’s treasury department require that individuals and businesses pay taxes almost as quickly as they earn income. If taxes aren’t withheld from wages or other payments, then you will likely need to pay estimated tax payments each quarter.

Think of estimated taxes as a “pay-as-you-go” tax. Four times a year (quarterly), you are required to send Uncle Sam enough of your revenues to cover your income tax and your self-employment tax (Social Security and Medicare) obligations.

If you don’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. However, the IRS knows that calculating earnings isn’t easy, so it offers a safe harbor rule – if you pay at least as much as your previous year’s liability or pay within 90 percent of your actual liability, there’s no penalty for underpayment.

Who Pays Estimated Taxes?

If you are self-employed and expect to owe $1,000 or more when you file your annual return, then you must pay estimated taxes on income.  If it’s not through withholding, then it has to be done by quarterly estimated taxes. If your business is structured as a corporation, you’ll need to pay estimated taxes if you expect to owe $500 when you file.

How Much Should You Pay in Estimated Taxes?

Calculating what you owe each quarter requires figuring out your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Each business situation is different, especially if you are a new business owner, so it’s worth spending some time with a tax advisor to understand the best calculation method for your situation.

You have a number of options when it comes to calculating what you owe each quarter:

  • Use Form 1040-ES – You can calculate your quarterly estimated tax payment using Form 1040-ES (the same form used to pay estimated taxes), which includes a worksheet that helps you estimate how much you owe for the current year. Corporations should use Form 1120-W to calculate estimated taxes.
  • Refer to Last Year’s Return – If you have been in business for a while, you can refer to your previous year’s federal tax return. Include all the income and deductions you expect to take on your current year’s tax return and refer to the total tax you paid so that your estimated tax payments are in the same range as last year’s taxes (100-110 percent is the range to shoot for to avoid underpayment problems).
  • Make a Quarterly Calculation – If you are a freelancer or independent contractor and face fluctuating or cyclical income, you might prefer to calculate your estimated taxes on a quarterly basis.

The IRS offers more advice in its Estimated Taxes Guide on how to calculate your payment and adjust estimates if you think you are paying too much – or too little – as the year progresses.

When Are Payments Due?

For estimated tax purposes, the year is divided into four payment periods. Payments for each year are due on the 15th day of April, June, September and the following January. You should try to pay at least the minimum owed by the due date (with the remainder paid on April 15), or risk incurring penalties from the IRS or your state.

How To Pay Estimated Taxes

Paying your estimated taxes is an easy process. If you are filing as a self-employed individual, use Form 1040-ES, which includes quarterly payment vouchers to submit with your payment. Corporations can deposit the payments by using the Electronic Federal Tax Payment System for deposit coupons (Forms 8109). Once you are in the system, the IRS will send you payment vouchers at the end of each tax year so you won’t have to worry about downloading the latest forms.

Paying Estimate Taxes to Your State?

You need to pay your estimated state income taxes at the same time you pay your federal taxes. Find links to your state’s tax office for the appropriate forms here.

Talk to a Tax Specialist

Spend an hour with a tax specialist to help you understand what the best calculation methods are, how to appropriately track and deduct expenses, and how to maintain good records. Many will provide this initial consultation for free simply because they hope you will return and use them come filing season.

Additional Resources

 

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

Payroll Tax Cut Extended to the End of 2012

Saturday, February 25th, 2012

Tax Cut ExtendedIR-2012-27, Feb. 23, 2012

WASHINGTON — The Internal Revenue Service today released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut benefiting nearly 160 million workers.

Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted yesterday, workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate in effect prior to 2011. This reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011, enacted Dec. 23.

No action is required by workers to continue receiving the payroll tax cut. As before, the lower rate will have no effect on workers’ future Social Security benefits. The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund.

Self-employed individuals will also benefit from a comparable rate reduction in the social security portion of the self-employment tax from 12.4 percent to 10.4 percent. For 2012, the social security tax applies to the first $110,100 of wages and net self-employment income received by an individual.

The new law also repeals the two-percent recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now repealed recapture tax does not apply.
The IRS will issue additional guidance, as needed, to implement the newly-extended payroll tax cut, and any further updates will be posted on IRS.gov.

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

Why Did My Taxes Change?

Tuesday, January 17th, 2012

Employee Net PayEach year, payroll departments are inundated with inquiries about changes to the net pay employees receive.  In most cases, a simple reminder that the tax tables change as of January 1st is enough, but some employees will want to confirm that the correct amount of tax was withheld from their paycheck.  Here’s a simple way employees can do their own verification by using the tables in the “Wage Bracket Method for Income Tax Withholding” section in the IRS Publication 15, the Employer’s Tax Guide.

This IRS publication, which also includes a lot of other useful information about income taxes, can be found by clicking here.

Six Important Facts about Dependents and Exemptions

IRS TAX TIP 2012-07, January 11, 2012
Even though each individual tax return is different, some tax rules affect every person who may have to file a federal income tax return. These rules include dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2011 tax return.

  1. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,700 on your 2011 tax return.
  2. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.
  3. Exemptions for dependents. You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the Social Security number of any dependent for whom you claim an exemption.
  4. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe.
  5. If you are a dependent, you may not claim an exemption. If someone else – such as your parent – claims you as a dependent, you may not claim your personal exemption on your own tax return.
  6. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

For more information on exemptions, dependents and whether you or your dependent needs to file a tax return, see IRS Publication 501. The publication is available at www.irs.gov or can be ordered by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant at www.irs.gov to determine who you can claim as a dependent and how much you can deduct for each exemption you claim. The ITA tool is a tax law resource on the IRS website that takes you through a series of questions and provides you with responses to tax law questions.

Link: IRS Publication 501, Exemptions, Standard Deduction, and Filing Information

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

How Do I Read My W-2?

Wednesday, January 11th, 2012

W-2 Form1)     What do I do if my name or SSN is wrong?   Answer: Speak to your payroll department; a W-2c should be filed in replacement of the incorrect W2.

2)     What do I do if my address is wrong?  Answer: It is OK if your address on your W-2 is not accurate.  You just need to use your correct address on your tax returns and it is OK if it is different from your W-2.

3)     Why doesn’t the YTD on my last paycheck of the year match my W-2 amounts? Answer: Box 1 of your W2 is for federal taxable wages. To determine the amount in box 1, your total compensation is reduced by any pre-tax deductions or deferred earnings you’ve had within the year.

4)     Why are boxes 3 and 5 different than box 1?  Answer:  Box 3 and 5 are for SS & Med taxable wages. Some earnings and/or deductions, such as, 401K, 403B, or SIMPLE are SS & Med taxable but not taxable for Federal Income Tax (Box 1).  If boxes 3 and 5 don’t match each other, the employee probably reached the Social Security wage cap.  Social Security is only taxed on the first $106,800 wages (2011 cap) but Medicare does not have a cap.

5)     How can I prevent owing taxes when I file my annual return? Answer: Verify that your employer has an accurate W-4 Form on file, listing the proper number of withholding allowances, for your current situation.  For guidance on choosing your proper withholding allowance, visit www.irs.gov to access the “IRS Withholding Calculator” tool along with many other resources available, including the 2012 W-4 Form and instructions.

6)     Where are my pre-tax deductions shown on the W-2? Answer: Pre-tax deductions are not necessarily shown on your W-2.  There are only a few specific pre-tax deductions that are required to be specified or shown on your W-2.

7)     Why is the amount I had deducted for my HSA different than the amount in box 12W? Answer: The IRS requires the combined employee and employer HSA amounts to be included in box 12W.  Your last paystub of the year can be used to determine the employee contribution amount and the employer contribution amount.

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.