The IRS defines a self employed person as one who:
- Carries on a trade or business as a sole proprietor
- Is an independent contractor
- Is a member of a partnership, or
- Is in business for yourself in any other way
General Tax Considerations For The Self Employed
If you earned $400 as a self employed individual, you are required to file a tax return using a Schedule SE.
How to Calculate Estimated Tax:
Visit the IRS website at www.irs.gov and get the Form 1040-ES worksheet. This worksheet will help you calculate your estimated taxes.
When you pay your estimated taxes you must pay either 100% of your previous tax return or 90% of your 2009 taxes owed. If you miscalculate you could be assessed a fee by the IRS.
You must make your payments according to the IRS schedule. Payment due dates are as follows:
April 15th, 2010
June 15th, 2010
September 15th, 2010
January 17th, 2011
How To Plan/Budget For Estimated Taxes
Once you have calculated your payment amount due, each month when you take your salary from the business you should automatically withhold your taxes (just as your employer would). Designate a personal bank account just for estimated taxes. Each month automatically transfer the correct amount into that account. Do not touch this money. In order for this to work successfully you will need to know how to budget.
You do not want to be on the wrong side with the IRS.
How to Pay Estimated Taxes
Visit https://www.eftps.gov/ and set up an account online. You will be mailed a PIN and then you can activate your account. Once you sign in, you will be able to link a bank account. Link it to your bank account that has your estimated taxes which you have been withholding on a monthly basis.
Now you can schedule automatic quarterly payments. You indicate the transaction date and amount and those funds will automatically be paid to the IRS on assigned date. Beside the “Tax Type” row, just enter “Estimated 1040 ES”.
Remember, if your income changes dramatically you will need to adjust your estimated tax payment.
If you are not sure that you are making the right calculations for estimating your taxes, it is recommended that you see a tax professional to ensure that you are estimating the correct amounts.