Outright.com brings you straightforward tips on simplifying your accounting and putting the focus back on the creative. (Note: This info may only apply to US sellers.)
Sole-proprietors in the U.S. — the vast majority of U.S. Etsy sellers included — get the pleasure of paying taxes not once, but four times per year. And one of those deadlines is coming up in just a few short days.
Why Quarterly Estimated Taxes?
When you work for a company as an employee and receive a regular paycheck, income taxes are fairly simple. They come out of your paycheck before you can even grasp it in your hot little hands, and only around April 15 do you have to worry about filling out some forms and, hopefully, getting a hefty refund electronically deposited later.
But for those of you who are sole-proprietors, you don’t have the luxury of an employer conveniently deducting taxes from your paycheck. You are tasked with sending these taxes straight to the IRS yourself. The IRS requests that this be done four times a year; thus, quarterly estimated taxes.
How Much Do I Pay?
All income taxes sent to the IRS are “pay as you go.” But since most people pay throughout the year by tax withholding in their paychecks, they don’t have to worry about calculating estimated taxes like many Etsy sellers and other sole-proprietors do.
The IRS does offer us a little guidance when it comes to figuring out how much to pay. For example, even if your business has grown by leaps and bounds this year, as long as you pay the same amount of tax you owed last year, you are safe from IRS penalties and fees (this is known as the safe harbor rule). Also, you only need to pay quarterly estimated taxes if you will owe more than $1,000 in taxes at the end of the year.
The easiest way to pay your quarterly estimated taxes is to simply look at how much you owed last year and pay the same amount. But you may not want to do that for any number of reasons, most notably underpayment and overpayment. If you know you will owe a lot more this year than last year, you may want to make higher quarterly estimated taxes and just get it over and done with to avoid a huge tax bill in April. On the other hand, if you are making less this year than you did last year, you may not want to match last year’s tax liability. Sure, you get a refund at the end of the year, but would you rather the IRS hold on to your money or let you keep it?
If you want to calculate how much you will owe for the year, check out Outright.com’s Tax Tab. A favorite Outright.com feature is the estimated tax calculation, where you can get a rough estimate on how much you might want to pay per quarter.
How Do I Pay?
While figuring out all the rules and regulations regarding your quarterly estimated taxes is pretty difficult, naturally the IRS makes it fairly easy to pay. All you need to do is download form 1040-ES, fill out the voucher, and send it, along with a check, to your nearest IRS office. The Form 1040-ES even provides the addresses based on your location.
What If I Don’t Pay My Quarterly Estimated Taxes?
You rebel, you! As distasteful as the thought of shelling out your hard earned money is, there are financial penalties involved if you don’t pay four times per year. The simple calculation is that you’ll pay 3% annual interest of what you’ve underpaid (based on 2010 published IRS interest rates). If you haven’t paid up by the end of the year, the IRS will calculate how much you owe in penalties and fees based on your tax return. “Three percent” is not a consistent or exact number, so if you are considering underpaying, this is one area where it’s often beneficial to ask for an accountant’s advice. Or better yet, just take your medicine and make your quarterly estimated tax payments so you don’t have to deal with complicated forms and formulas at the end of the year.
Quarterly estimated taxes are how the government takes its piece of your business pie. For better or worse, taxes are due.