How To Survive Paying Taxes
Death and taxes. Ben Franklin said that they are the only two things in life that are certain. But you don't have to let your tax responsibilities drive you or your business to an early grave.
One problem many new business owners may run into is not budgeting money to set aside for your taxes. You may find yourself short on cash when it comes time to file. Even if you cannot pay, file your tax returns anyway!
Don't wait until the time to file has come and gone. Gather your records and file all your tax forms by their due dates' even if you can't pay a cent. Of course, to keep down the interest and penalties, try to pay as much as you can. If you receive a notice from the IRS, respond right away. Don't ignore it; it won't go away.
If the next deadline rolls around and you still can't pay, go ahead and file on time. At least you'll avoid the failure-to-file penalty. Along with your return, attach an Installment Agreement Request (Form 9465). You can propose your own monthly payment date and amount using this form. If circumstances make it unlikely that you can pay the full tax even on an installment plan, ask for a copy of Publication 594, What You Should Know About the IRS Collection Process. This publication lists alternative methods for resolving your account.
The failure-to-pay penalty may be reduced from .5% to .25% per month during the period in which an individual installment agreement is in effect. However, you must have filed on time.
The Do-It-Yourself Social Security Program
For most employees, Social Security and Medicare taxes are deducted from every paycheck, helping to provide retirement income and Medicare coverage. But if you are self-employed, you pay for your coverage through the self-employment tax that you compute and pay when you file your federal income tax each year.
Generally, if you carry on a trade or business as a sole proprietor, an independent contractor, a member of a partnership that carries on a trade or business, or are otherwise in business for yourself, then you are self-employed. Part-time work can qualify as self-employment even if it's work you do in addition to a regular full-time job. Generally, if you have net earnings from self-employment of $400 or more a year, you have to pay self-employment tax. The current tax rate is 15.3 percent.
In most cases, self-employment income does not include interest, dividends, capital gains, or rent from real estate. Many self-employed people will have to make quarterly estimated tax payments. It's important to remember that your self-employment tax will increase the total federal tax you owe. Be sure to take this into account when you determine how much estimated tax to pay each quarter. When you file your tax return, you must fill out Schedule SE, where you report your self-employment income and calculate the self-employment tax you owe.
Information courtesy of the Internal Revenue Service.