Sole Proprietor Tax Payments

A very common question heard in a lot of tax and accounting offices….

How do I pay my taxes as a Sole Proprietor?

How much do I pay?

The simple answer to the second question is, “It depends”.  Really?  That truly was not a very helpful answer.  And I do agree with you on that one.  So, I will attempt to answer both of these questions in as short a blog as I possibly can.  It will be more involved than you might think.

Taxes should be paid on a quarterly basis.  For you, it makes the tax liability not hurt so bad by making 4 payments throughout the year vs all at one time.  The federal government requires this if your last year’s tax liability was over $1,000.  Some people have questioned this requirement.  The easiest way to explain this is that the feds require payments throughout the year just as an employee’s taxes are paid throughout the year.  When you are paid as an employee, your employer deducts your taxes from each paycheck.  Then, depending on their payment schedule, the employer is required to make semi-weekly, monthly or quarterly deposits for tax liabilities that were withheld from each check.  In the same way, you are required to make quarterly payments to cover your tax liabilities.

Unfortunately, as a sole proprietor you are required to pay your entire Social Security and Medicare (FICA) liabilities.  As an employee, the employer pays half of that liability for the employee.  You are also required to pay your federal taxes in addition to the FICA in its entirety.

So, how do you know what that will be?  You can plan on paying 15.3% for Social Security and Medicare as well as an additional 10%-39.6%, depending on your income level.  You can find the draft of the 2017 tax tables here or Google [year] Income Tax Table.

How do you know what your Adjusted Gross Income is from your business?  You need to look at your business income, then subtract any expenses that you can take off and that is what your tax liability is figured on.  You will take this annual figure and divide it by 4 to figure out what your quarterly payments need to be.  Simple enough, right?  Not really.  There really are a lot of rules as to what can and cannot be written off as being business expenses.  For instance, a lot of people think they can keep track of their mileage and deduct fuel and auto maintenance/repair.  This is not the case.  You either can deduct the actual expenses or you can take the business miles.  When the government dictates what those business miles are figured at, they take into account the wear and tear on your vehicle as well as the cost of fuel.  This is just one example of knowing what can and cannot be deducted as business expenses.  I am planning on writing another blog about business expenses in March.  So, be looking for that information in about 2 months.

Now on to the first question.  How do I pay my quarterly taxes as a sole proprietor?  Simple answer here.  It all depends on where you live.  You need to send your payment in along with a 2017 1040-ES Voucher  (be sure to Google the correct year if you are needing a different year).  This voucher will ensure that your payment is being accredited to you when it comes times to file your 1040.  You will need the primary taxpayer’s name and social security number, spouse’s name and social security number and you will also need the full address.  On pages 9 and 11 of the 2017 1040-ES pdf I linked above for you, you will find the vouchers.  Voucher 1 is for the first quarter (due 4/15), voucher 2 is the second quarter (due 6/15), voucher 3 is the third quarter (due 9/15) and voucher 4 is the fourth quarter (due 1/15).  You will find the mailing address on page 5.  There is a worksheet to help you figure your payments if you still have questions.  This is found on pages 6-8.  Page 9 contains a spot where you can record each payment along with the date it was paid to help you with your tax filing come April 15.

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