Hi Goodenow, and thank you for your questions!
You asked:
- How does starting a business effect my taxes?
- How much do I need to pay in quarterly estimated taxes?
- Do I have to pay quarterly estimates on income taxes to my state too (I live in Washington State)?
1.Starting a business can significantly impact your taxes in several ways, here are a few:
- You may owe self-employment tax on your business income. This is the equivalent of payroll taxes for employees. The tax rate is 15.3% on your net business income.
- Your tax filing status changes from individual to sole proprietor (or whatever business type you form). You report business income/expenses on Schedule C and it flows through to your personal tax return.
- You can deduct valid business expenses, which reduces your taxable income. Things like supplies, utilities, vehicle mileage, etc.
- You may need to pay estimated quarterly taxes to the IRS if you expect to owe $1,000 or more. The amount is based on your expected tax liability for the year.
2. Yes, if you expect to owe $1,000 or more in federal income tax for the year, you generally have to make equal quarterly estimated tax payments to the IRS.
Here are a few things to consider when determining how much to pay for quarterly estimated taxes:
- Estimate your total tax liability for the year - this includes income tax, self-employment tax, and any other taxes you may owe. Consider income sources, deductions, credits, etc.
- Determine how much tax you've already had withheld from paychecks or other income sources. This counts toward your total tax paid.
- Calculate 90% of your estimated tax liability for the year. To avoid penalties, your quarterly payments should equal at least 90% of what you expect to owe.
- Divide this amount by 4 to determine your required quarterly payment amounts. You can pay a bit extra to be safe.
- Payments are due by April 15th, June 15th, September 15th, and January 15th of the following year.
3. Yes, you will also need to make quarterly estimated tax payments to the state of Washington if you expect to owe more than $1,000 when you file your state taxes. The deadlines and percentage thresholds are similar to federal estimated taxes. The payments go to the Washington State Department of Revenue. Check their website for more information. Washington State Department of Revenue
For more information on this topic, please check out the following links:
Estimated Taxes: How to Determine What to Pay and When
A Comprehensive Guide to Paying Quarterly Estimated Taxes
Common Questions About Paying Estimated Taxes
Please feel free to reach backout with any additional questions or concerns you might have!
Have an amazing rest of your day!
Terri Lynn, EA
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