Estimated Taxes? What is that?

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Estimated Taxes? What is that?

The first cultural shock related to taxes is termed as Estimated Taxes for budding business owners.

Here is the scenario for a typical employee taxes:

Employee pays following taxes

  • Social Security-6.2%
  • Medicare taxes-1.45%
  • Federal Income taxes (per their own W-4)
  • State Income Taxes (per their own W-4)
  • City Income Taxes (Depending upon the work city)

An employer, then adds Employer’s portion of Social Security tax and Medicare tax and deposit the amount with respective agencies.

As a Sole Proprietor, YOU are the one who takes care of the whole game. A Sole proprietor pays Self Employment Taxes. Self-Employment Taxes comprises of Employee and Employer’s portion of Social Security and Medicare taxes.

Now the question is, “How do I pay these taxes on the income I generate during the year?” And the answer is simple-Estimated Taxes.

The governing rule behind the estimated taxes, is ‘Pay As You Earn’. Just like an employee, a self-employed person is required to pay Estimated Taxes to cover Social security, Medicare and Federal Income taxes due on the profits generated.

The Estimated taxes can be paid in four different installments-in April, June, September and December/January.

It is wise to project the profit and pay some taxes during the year to avoid penalties. Typically, if you pay 100% of the taxes due in the current year as estimated taxes or 110% of the taxes owned in the previous year as estimated taxes, you will not be liable for penalties.

If you need any assistance in calculating your estimated taxes, you can contact Tejal Dhruve CPA at 614-742-7158 and we would be happy to assist you.

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