Self-employed individuals have to make quarterly estimated tax payments. However, many self-employed individuals are penalized for underpayment because their income varies. Today, we are discussing how to avoid self-employment tax penalties.
Make Payment Based on Prior Year Earnings
It is possible to avoid having a penalty enforced if you pay at least the same amount that you paid in taxes the prior year. Keep in mind if this is your first year being self-employed you will not encounter any penalties for not making estimated tax payments yet your bill may be overly large.
Seek Assistance
If you have never filed self-employment taxes before, seek assistance from an accountant so you can make sure that you are filing your taxes correctly.
Use Separate Business Financial Accounts
Have specific credit cards and bank accounts for your self-employed income and expenses. This way you will be able to add up your income and expenses easier.
Document Your Income
In order to avoid being shocked by your tax bill at the end of the year and not having the money to pay your taxes document your income and monitor it so you can know how much you will have to pay in taxes.
Overpay in Estimated Taxes a Little
Tax penalties can add up. Therefore, always pay a little more than projected when making your estimated tax payments. This way you will not lose any money by having to pay the IRS penalties. If you over pay you will get your money back in the form of a refund.
Conclusion
Paying penalties when self-employed can be expensive. If ever in doubt, always refer to the IRS official website or call their helpline.
We are able to serve clients in Redmond, get in touch with us if you are a small business looking for a Redmond CPA firm! We are also a Bellevue and Seattle CPA firm! Give us a call at (425) 483-6600!