Thursday, March 3, 2011

How do I pay Self-Employment or Estimated Taxes?

Q.  Someone just told me now that I'm self-employed, I should start making estimated quarterly payments of my taxes to avoid penalties. When I was working my employer always withheld income taxes. How much do I have to pay and how do I make them? CR, California

A.  If you are no longer having any type of federal or state withholding, you indeed may incur a penalty if taxes are not prepaid. Currently you are allowed only to owe $1,000 with your timely filed 1040 without incurring a penalty. Since you are from California, the balance due must not exceed $200 without incurring a penalty. Each state has a different threshold, so be sure to check for each state you are required to file a return.

I can't tell you how much to pay without knowing all the facts about what you expect to make. Wouldn't it be nice to have a crystal ball! A good place to start would be with your 2010 return. Review each line item and ask yourself if the amount will be greater or less than you reported in the current year. Then, estimate the amount of self employed income you expect to make. Multiply your self-employment income by 15.3%. This will cover your self employment taxes, i.e. social security and medicare. Note: if you have a loss from your self-employment, no self-employment taxes are due.

The final part will be to estimate the amount of income taxes you expect to owe in the coming year. Add that to your self-employment taxes, and the result will be the amount of estimated taxes you are required to pay. You pay them on Form 1040-ES and in California, 540-ES on a quarterly basis. Remember, you only need to pay California income taxes. Currently there are no self-employed state taxes. The address to mail them to is right on the form. Alternately, you can now pay online. Go to the IRS website and the FTB website and follow the instructions.

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