Quarterly taxes for single-member LLC

[mceasley]

I started a single-member LLC in October 2022 but didn't bill any work until 2023. I have yet to pay quarterly taxes but recognize that I need to do so. I have a few questions:

1. Is there a penalty for not paying estimated quarterly taxes?

2. How do I calculate what to pay? I know what I have received in payment, but what expenses can be deducted? I am a newbie, sorry. I work from a home office. Can and should I deduct the full cost of my home's internet, for example? Same for my electric bill, snacks, phone, new equipment, etc.

3. Does my personal return, filed jointly with my partner, come into play? If so, how do I calculate what it'll be for this year?

4. I am starting a full-time role soon, so my LLC will be used less. Will I still need to send in quarterly payments?

Thanks in advance for your help. Truly, I feel lost as to what I should be tracking and deducting. Just want to make sure I don't miss any potential deductions, or claim ones that I shouldn't.

[Tax Hero Niki]

Hi mceasley!

Congrats on starting your SMLLC! Great questions.

1. The penalty for underpayment of quarterly taxes is based on the tax liability outstanding, calculated in three-month intervals. If your tax liability is caught up, then there is no penalty.

2. TurboTax has tools for this. Check out the Self Employment Tax Calculator or TaxCaster Tax Calculator. All of your income is summed together, and the tax is calculated on that. In other words, you will need to factor in your wage income, and if married filing jointly, that of your spouse's as well, in conjunction with your SMLLC income, to determine your tax bracket and tax liability.

You can deduct all business expenses that are ordinary and necessary in the regular course of business. For example, if you are a remote teacher, it probably does not make sense to deduct mileage if you aren't driving to your clients, but you can deduct your internet and equipment costs. TurboTax has a great guide for this. Just keep track of everything you spend on the business.

3. Yes. See answer to 2.

4. It depends. Check out the calculators in answer 2. You also have the option to increase the amount your W-2 job is withholding, instead of sending in quarterly payments. It all goes to the same place.

[johnd84]

Hi @mceasley and thanks for your question!

The IRS calls it a "penalty" for not paying estimated taxes - however it is different than other tax penalties. It's really interest your paying. You may not get it exactly correct and that's ok! The "penalty" may be there but it's a small percentage. I find that most people are more concerned about owing a large amount in April - quarterly payments help you reduce this amount. The general idea is you total up your self employed revenues and subtract out your expenses. You then multiply this amount by your income tax bracket percentage to give you a general idea of how much you need to pay in estimated taxes. This number divided by 4 is your approximate quarterly payment. Here's an article to help you with this: TurboTax Guide to estimated taxes.  

Here is a link to help you determine which tax bracket you are in: TurboTax Income Tax Bracket Calculator  

To determine which expenses will reduce your LLC income, you generally want to consider any and all expenses that are business related. You can take a deduction for your home office. You either take a percentage of actual expenses like your internet bill, or you can take the Simplified Home Office Deduction where you take a flat amount based on the size of your office. I am a big fan of this simplified method. If you take actual expenses you need to track depreciation if you own your home, which can get tricky if you need to know what it is 5 or 15 years from now. 

Here's our guide to the Home Office Deduction: Home Office guide  

[Cindy4]

Hi @mceasley !

1.  The IRS calculates the amount of the Underpayment of Estimated Tax by Individuals Penalty based on the tax shown on your original return or on a more recent return that you filed on or before the due date. The tax shown on the return is your total tax minus your total refundable credits.

They calculate the penalty based on:

• The amount of the underpayment
• The period when the underpayment was due and underpaid
• The interest rate for underpayments that we publish quarterly

2.  To calculate what to pay, you will want to base it on your profit.   Yes you can deduct expenses related to making the business income.  You will want to allocate things that are used both personally and for the business accordingly, such as internet.  Here is a good resource regarding calculating estimated tax:

https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-p...

3.  Depending on what type of tax entity your LLC is, you may be filing a schedule C on your personal 1040 that you file jointly.  However, if your LLC is a C corporation, it will be separate and you should receive a W-2 that you would file on your personal return.  If is is an S corporation, you would receive both a W-2, and a K-1 that you would file on your personal return.  If you didn't do an entity declaration when you organized the LLC, you will default to the Schedule C requirement.

4.  If your self-employment income falls low enough that your W-2 withholdings cover all tax due, you won't have to worry about estimated payments, however you will want to keep a close eye on it.  You can either adjust your W-2 withholding to cover it, or make the estimated payments.

Here is another resource for self-employment that you may find useful:

https://turbotax.intuit.com/personal-taxes/self-employment-taxes/

Hope this helps!

Cindy