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Self-Employed? Estimating and Paying Your Taxes

» Introduction
Paying taxes to the ITS gets trickier if you’re self employed. The good news is that self-employed individuals use the same basic tax form – the IRS 1040). Simply stated, the self-employment tax is a tax for people who run their own businesses, big or small. Unlike a wage-earner, a self-employed person can deduct Social Security and Medicare taxes from their tax bill.
» Step 1
At the end of 2007, tax rate for self-employed individuals was 15.3%. The IRS slices that rate into two categories – 12.4 $ of it goes to Social Security (yes, as a self-employed taxpayer you pay both the employee and employer portions of that tax, or an extra 7.65%) and 2.9% of it goes to Medicare. Note that the employer half of the Social Security payment – otherwise known as the “self-employed tax” is tax deductible
» Step 2
The self-employed pay these taxes on an estimated basis. That means “estimating” your tax bill if you anticipate owing Uncle Sam when you file your return. (Note: no tax payment is if the amount due after subtracting withholding and credits is less than $1,000.) In general, the self-employed do so on Form 1040-ES, Estimated Tax for Individuals, which helps figure out and estimate taxes. For example, if you estimate your tax liability to be $10,000 for the year, you can ship the IRS four quarterly checks of $2,500 apiece. Or, you can wait until the following April 15th and fork over the entire $10,000 at one time.
» Step 3
The IRS offers several different scenarios where you can pay estimated taxes. It has a “voluntary” payment mechanism where you can pay estimated taxes based on your previous year’s tax bill, even though this year’s tax bill may be higher. By paying under the voluntary method, the IRS allows you to pay just the minimum amount required now and pay the rest on April 15th. Voluntary payment is a good move if you have a steady flow of income and have the time and financial wherewithal to spread your tax payments out through the year.
» Step 4
When you decide what method you use to pay your taxes, take your personal characteristics into consideration. If you’re the sort who can’t resist temptation, pay on a quarterly basis. That way you won’t be tempted to grab some of that $10,000 and buy that new big screen TV you noticed down at Best Buy. But if you can manage to leave your mitts off of the money, you can gain some valuable interest on it by waiting to pay (

Also, note that when you pay taxes on an estimated basis ahead of time, you may gain peace of mind. But you also may lose interest on the money that could be working for you in your bank or investment account instead of for Uncle Sam.
» Step 5
If you pay your taxes on a quarterly basis, you’ll have to meet certain IRS calendar deadline requirements. Typically, that means payments are due April 15, June 15, September and January 15 of the following calendar year.

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