Question related to self employment

[Caroldehaven]

Thank you in advance for your help! Im soo confused and anxious about doing estimated taxes.  Please explain in as simply as you are able to.

I have a small business and my husband works another job of which he recieved a W 2 and has taxes taken out each paycheck. We will file jointly next year and will report business income on a schedule C. 

1. My understanding is that I can proceed with calculating estimated taxes based on only my small business Gross income or Net after deductions? Is this correct please?

2. Do I figure out Social Security and Medicare taxes at 15.3% and then incorporate this amount into my estimated taxes owed? 

3. How does the Social Security and Medicare taxes eventually get to where they need to be and when are they credited to my earnings?  Does this happen when we file our joint return?

4. Do I have to apply any business related deductions reducing estimated taxes owed or can we just enter them on a schedule C when we file our joint return? (I can't be sure what all of our expenses will entail for the year).

5. My business income may vary widely. Can I adjust each quarters payments?  There isn't really a way I will know how much I will make for the year. 

6. What is the Safe Harbor rule? Last year my business Gross income was approximately $15,000.00, but due to so many start up and other expenses, we showed a loss of approximately-$ 400.00. 

Thank you kindly!!

[MaryK4]

1. You can base your estimated taxes on your Net income, since this is the amount that you will be taxed.

2. Yes, you must use calculate your estimated taxes with the social security/Medicare taxes on the self-employment income- however, you can use 7.65% instead of the 15.3% because you do get an adjustment to income.  

3. The total social security./Medicare taxes you pay when you file your tax return are reported to the Social Security Administration so you will will full credit when you retire.  It is a good idea to check every year to make sure you have the correct amounts credited, because it is much easier to resolve any issues earlier rather than finding out ten years later there was an error. 

4. It is usually better to base your estimated payments with the deductions because it does encourage you to keep up to date on your records, and in many cases you will be paying a lot more in estimated payments which is not efficient (it is a tax-free loan to the government).

5. You can make the adjustments each quarter; it is your personal choice.

6. The safe harbor rule allows you to use your current year tax liability to avoid the underpayment of estimated taxes penalty.  The IRS will not charge you an underpayment penalty if you pay at least 90% of the tax you owe for the current year, or 100% of the tax you owed for the previous tax year, or you owe less than $1,000 in tax after subtracting withholdings and credits.  
(This rule is altered slightly for high-income taxpayers. If the Adjusted Gross Income (AGI) on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.)

You can also use the IRS Tax Withholding Estimator. 

[Caroldehaven]

Thank you so much for your reply.

Just a couple of clarifications please. 

1. So it is ok to just do estimate on my small business income and not my husband's job earnings for which he has taxes taken out of checks during the year? It seems like it wouldn't make sense to estimate my husband's taxes as he has the taxes without every paycheck

2. I'm still a bit confused about the Social Security. I pay in funds for it with the estimated tax each quarters but then how does it get to the Social Security and Medicare fund? Does this happen after we file our joint return next spring? I don't understand how it works.  

3.

Since our business was at a $400.00 loss last year, would this mean that we wouldn't be penalized for not paying quarterly tax or for paying little under the Safe Harbor rule? I do plan on  paying significant quarterly tax, I'm just trying to understand.  Is the gross income what is looked at under the Safe Harbor rule or is it the income was remaining after expenses and deductions  (the net income) although we ended up with a loss. 

4. Will I be penalized if I dont take deduct expenses etc until we do our joint return next spring? I know its like loaning money to the government but I'm afraid of not paying enough tax. We just want to error on the safe side. 

5. Do I send in a 1040SE and any state form every quarter or just for first quarter and them send vouchers with payment for second, third, and? Do I do a form for Minnesota after I do the 1040 SE and then pay quarterly taxes to the state too? 

6. What happens if we make uneven quarterly payments? Do we have to fill out other paperwork if a quarters payments varies from the initial estimate? 

7. If I overpay the taxes, which will probably happen, do we have a choice of getting it refunded or credited?

Hopefully, I can survive this first year of business, taxes, forms, procedures etc!

Thank you for your time and patience in answering my questions and for providing clarification

[Vanessa A]

1.  Yes and No.  The payments you make should be based just what you would owe, however, when doing the calculations, you should consider how much he makes so that you are making the payments that are ordinary income taxes based on the correct tax bracket.  For example, if you make $55k from your business and he makes $55K from work, and you calculate your taxes based on Married Filing Jointly, then you would both only have withholdings at the 12% bracket, when in reality it should be at the 22% bracket.  So, you don't need to pay taxes on his, but you do need to consider what he makes to properly calculate your tax rate. 

For your self-employment taxes, his income does not affect yours. 

2.  Yes.  At the end of the year, when you say this is how much I actually made by filing your tax return, then the payments that would be due for SS and Medicare are made there.  You do not have to do anything special to direct the money to go to the correct place. 

3.  To not be penalized you would need to pay 100% of your last years tax LIABIILTY for your return, not just your business. This is found on line 16 of your form 1040. 

4.  No.  You are never penalized for overpaying, only underpaying.  If you want to overpay, that is perfectly fine with the IRS. 

5.  Your 1040SE attaches to your form 1040.  You will only send this in when you file your actual return.  You can either send in your vouchers quarterly or pay online directly at IRS Direct Pay. 

6.  No.  There is no paperwork to fill out to let them know you are making uneven payments. 

7.  Yes, if you overpay, you do have the option to get it refunded or you can  have it applied to the next years taxes. 

[Caroldehaven]

You are amazing and I could almost cry in that I feel relief that someone is helping me.  

Im still just a bit confused on the estimated tax and when a penalty occurs. 

We did file a joint return last year but the business had a loss.  I understand that I must consider tax bracket based on our last year's tax return when trying to estimate my business tax.   As far as considering my husband's income too, if I pay tax estimated tax based on his income as well as mine, I would be paying amounts for taxes again throughout the year that he already has deducted from his checks so it would be a lot, more than income from the business.   For instance, say total tax liability last year was 8000.00 but the business only owed 1500.00 of the income based on the earning from the business, wouldn't I do estimated tax and pay tax in accordance with our tax bracket but only enough with quarterly tax to cover taxes owed for my business?  I'm so confused about this.   Do I have to pay in enough tax during the year to be sure enough taxes are being taken out of my husband's pay through his employer too?  In this situation, do you mean that we could be penalized if my husband doesn't have enough taxes taken out of his check and then we have to pay in to state and federal based on his not having enough taken out of checks over the course of the year?  Gross earnings from my business were only 15,000 from my business (though actually ended up at a loss) though my husband's earning were much greater.  Would I pay taxes during the year incorporating both his taxes and mine from the business to avoid a penalty?  I wouldn't have any money left each month from the business earning then.  I'm so confused.   Please see the next paragraph, does the next paragraph make sense? 

Or do you mean that I must pay adequate taxes from my business and as long as I do, all will be well.  But if I don't, then there would be a penalty based on just the business underpayment during the year?   I have no good idea what my business income will be as it is very variable.   Is the line 16 amount the threshold I must meet if I wish to avoid any penalty for my business earnings underpayment?  Maybe that's it!  As long as I pay enough for my business taxes during the year, do I need to worry if my husband didn't take enough tax out during the year and has to pay in at the end of the year?  Could you please expound on this for me?

The confused and tax know how distressed new business owner.  

Thank

Thank you for your patience and time.  

[DawnC]

Yes, you only need to pay the estimated taxes for expected business income, since your husband has withholding done on his wages through his employer.   In your example, your estimates should cover the $1500 of tax liability generated from the business.   

You do not have to pay estimates to cover your husband's earnings.   He could give his employer an updated W-4 form if he wanted to have a little more, or less, withheld each pay period.    You could increase his withholdings through his employer to cover your expected business income and not have to make estimated tax payments.   You will have to decide what the best option is.   You could leave his withholdings as is to cover his earnings and make estimated tax payments based on your business OR you could increase his withholding enough to cover his wages and your business income.   

The IRS levies underpayment penalties if you don't withhold or pay enough tax on income received during each quarter.   Even if you paid your tax bill in full by the April deadline or are getting a refund, you may still get an underpayment penalty.   So, your estimated tax payments + your husband's withholding = your total tax payments.   

Go through the estimated taxes for 2025 in TurboTax and let TurboTax prepare your estimates for you.   You will be able to factor in your husband's earnings and withholdings.   In TurboTax, you can go through the estimated taxes for next year section.   If you already filed your return, you will need to click on Add A State at the bottom of the home page to access your return.    You can do this for your federal taxes and your state taxes, if applicable.  You can also, enter your expected income and deductions in TurboTax or Tax Caster to get a feel for 2024's taxes.

Estimate next year's federal taxes

Estimate next year's state taxes

Your last paragraph is correct, except that if your husband does not withhold enough during the year, that too, can cause a penalty.   Any quarter for which you don't have enough tax payments (or withholdings) can generate a penalty.    And you do not have to make the estimated payments if it turns out you estimated your income too high.    You are not required to make the estimated payments.   For example, let's say you estimated $5k income for qtr. 2 and made the payment.   But it turns out, you did not make anything that quarter, you could adjust the next payment.   Since they are just estimated tax payments, they are not set in stone once you print them - you can always pay a different amount than what is on the payment voucher, or not pay it at all.  

Line 16 of Form 1040 is your ordinary income tax, but you also must factor in Line 23 to cover your self-employment tax for the business.   Line 24 is your total tax.   

Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. 

Topic 306 - underpayment penalties.   

[Caroldehaven]

Thank you!!!! I will have to go quarter by quarter I believe, due to income variability.  There is just no way of telling how much income the business will have. I'm scared to make a mistake! Please see additional questions below. 

Question; Is there a penalty for uneven quarterly payments?  If we skip a payment, if we feel we paid too much for a quarter, is there a penalty for skipping a quarterly payment?  I wish they wouldn't make it so difficult for a small business just trying to survive.  It is discouraging.

Question: Does one have to do another estimate using1040SE if payments vary quarter to quarter?

Question: Does one use a form to send quarterly payments to the state of Minnesota?  If so, what is the form please?  How does one get vouchers for the 1040 SE and the state of Minnesota? Does one do the 1040 SE first and then do the Minnesota form based on information on the 1040 SE?  

Question: Do I refer to our 2024 tax for the information needed on the 1040 SE.  

Question: Do I send in form 1040 SE copy each quarter with payment or just initially with first quarter?  

Question: If I don't factor in deductions and expenses in the estimates, can we still take the deductions and expenses when we file taxes and is there a penalty for not taking into consideration the deductions with the estimated taxes?  

I'm getting there and am very thankful for the help.  I'm hoping to survive this first year of business with all of this!  

Thank you so much

[RobertB4444]

You're doing good.  Keep it up.

There is no penalty for uneven or skipped quarterly payments as long as you're paying enough in.  A lot of businesses have variable income throughout the year and that results in bigger payments due for some periods that others.

No new estimates are necessary unless you are trying to hone the payments with new information.

Here is where to figure and file Minnesota estimated taxes.

Yes, it is always best to use the current year information to plan for the next year.  That is what the IRS uses.

You only send in the 1040 SE with your tax return.  You don't need to submit it with your estimated payments.

You calculate your estimates based on your income minus expenses.  If you don't have all of the expenses available you can calculate the estimates off your gross income and then take the deductions later.

The only way you get penalties is by underpaying your estimates.  If you still owe too much at the end of the year or didn't pay in enough during the quarters where you made the most then there will be interest or penalties added.  So if you're not sure how much to send and you can afford it then sending in a little extra is not the worst idea.

@Caroldehaven