What's a good rule of thumb about calculating taxes for someone who is self-employed?

Question

I'm starting my own business and I'd like to set back a little bit each month to pay for taxes at the end of the year but I don't want to pay in too much or too little; how would I calculate a good estimate? I'm guessing to gross $30,000 or less annually and it's a computer-based business so I doubt I'd be able to deduct mileage or depreciation (except maybe depreciation on my laptop, which I imagine won't be much). I won't have a whole lot of expenses, either, monthly membership dues of about $10-$20, office supplies which I'm estimating will be less than $25/month, and my cellphone and internet bill of $120/month. How much should I put back every month in my savings?

Answer 1

If you have no other income, 25-30%.

If you have other income 30-40%.

Run a mock tax return (1040es) and just realize that $30,000 of SE income =   $4250 in SE tax and nets 27850 of income.  If you are single the first $8950 isn't taxed, but even with no other income, you are already in the 15% tax bracket.

Answer 2

Your self employment tax for the year will be around $4240, and your federal income tax around $2620, so totalof around $6860 for the year, which comes to around $572 a month.  And you don't just put it aside, you are required to make quarterly estimated payments - if you don't, you'll pay penalties when you file your tax return.

Depending on where you live, you might also owe state and/or local taxes, and those probably have quarterly filing requirements too.

The amounts above assume you are single.  If you are married, your federal income tax will be affected by your spouse's income, so could be more than the amount shown.

Answer 3

Always ask an accountant.  You can cost yourself a lot of money if you don't to this right.

Whenever you pay yourself, you should put a separate amount in a savings account to pay your tax at the end of the year (or quarterly if you do it that way).  Your accountant should advise you what percentage to put aside, but I'd say at least 25%.

Answer 4

You need to do more than "set it aside".  You need to be forwarding your "set aside" to the federal and state governments once per quarter in what they call estimated payments.  Download Form 1040-ES from http://www.irs.gov/ and the equivalent form from your state.  The instructions that come with them will tell you what to do.

The best thing to do is to do an estimated 2008 tax return, using 2007 tax forms and tables.  You will calculate your business profit on Schedule C so download one of those in addition to the 1040.  And you will be paying self employment taxes so download a Schedule SE also.

As a very, very rough estimate until you do your estimated tax return, figure 12.4% for Social Security tax, 2.9% for medicare tax, at least 15% for federal income tax, and about 6% for your state unless you know what your real state tax rate is.  So a little over a third of your profit.

You might want to learn more about the subject by reading the web pages below.

Answer 5

One way to work it is to use last year's tax forms and fill them in with your expected income and expenses, then see what your tax liability would be.  If you use a program like Turbo Tax, it will actually walk you through all the steps and help you think of everything.  Another is with the simplified estimator Form 1040ES - http://www.irs.gov/pub/irs-pdf/f1040es.p...

If you are in fact already in business and generating income then you need to file estimated taxes quarterly.  Here's an IRS article that discusses taxes - http://www.irs.gov/faqs/faq-kw168.html