Self employment tax question

[Bryanlafaurie]

Hello. So I got fired as of December 2022 from my job. As of March 2023, I decided to go into business by myself doing small odd job construction jobs. Thankfully it has done well and I've been able to keep afloat since my termination. I do NOT have an LLC and have just received payment by either Zelle, Venmo, cash, and check for the different jobs I perform and complete. I have kept a detailed spreadsheet of all my jobs, the cost of labor and materials, and my profits. This is my first time ever doing something like this so I have not paid taxes on my income as of yet, but I have set money 12% of all my earnings aside for when I do file my taxes.

Am I wrong for not having paid taxes as of yet? I honestly don't even know how to pay taxes other than filing it at the end with TurboTax.

My second question is, because I own basically a cash business, am I more likely to get audited? I have all my records in order, it just makes me nervous having to think about that.

Appreciate any guidance you can give me.

[SwapnaM · Accepted solution]

@Bryanlafaurie Thanks for the question!! Congrats on being your own boss! 

In the United States, we have a “pay as you go” tax system. That means that the government expects to receive most of your taxes throughout the year. Because of this, employees have a certain amount of taxes automatically withheld from their paychecks.

On the other hand, if you are self-employed as a freelancer, contractor or home-based entrepreneur, you most likely don’t have taxes withheld from your pay throughout the year and are instead subject to quarterly estimated taxes. In general, you are expected to pay estimated taxes if you expect to owe $1,000 or more annually for your taxes.

The 2023 quarterly estimated tax deadlines are:

• 2023 1st Quarter (January 1 – Mar 31, 2023): April 18, 2023
• 2023 2nd Quarter (April 1 – May 31): June 15, 2023
• 2023 3rd Quarter (June 1 – August 31): September 15, 2023
• 2023 4th Quarter (September 1 – December 31): January 16, 2024

So for Self-employed, paying quarterly taxes is highly recommended to avoid underpayment penalties when you file next year. You can pay estimated taxes at the IRS website: https://www.irs.gov/payments

It is good that you are keeping good records for all the income & expenses. You being in a cash business, does not make you more probable for IRS AUDIT!! As long as you have excellent records, receipts etc you need not worry. 

Estimated Taxes: How to Determine What to Pay and When 

[Sean Enrolled Agent]

Hello Bryanlafaurie,

I'm glad to hear that you are doing well with your new business, way to go!

From reading your post, it sounds to me as if you know what you are doing! I would suggest looking into getting an accounting application such as Quickbooks. https://quickbooks.intuit.com/  That way you can enter in your income and expenses and have the totals and receipts taken care of.

It is OK if you have not filed for an LLC yet. You may want to talk to a local financial adviser or lawyer about whether or not an LLC is the right fit for you. An LLC may provide you with some protections in case something bad happens.

You asked "Am I wrong for not having paid taxes as of yet?". You stated that you had saved some money for taxes, way to go!
I would suggest that you do make estimated taxes each quarter. The IRS is a "pay as you go" type of entity. That means that you should be paying taxes on your earned income each quarter. 
According to the IRS, "If a taxpayer doesn’t pay enough or pays late, a penalty may apply." 

You can set up a direct pay with your bank account with the IRS by using this website: https://www.irs.gov/payments/direct-pay 

When you complete your tax return with TurboTax, there will be a question and a place for you to enter in the date and amount paid when filing your estimated tax payments.  You will want to keep records of your payments.

You also asked "because I own basically a cash business, am I more likely to get audited?" Well, the good news is that in the unlikely event that you were audited by the IRS, you are doing the right thing by keeping records of your income and expenses. Using a tool such as Quickbooks would help you to show your records with the IRS.
No one can predict if the IRS were to audit you. However, keeping records and making timely estimated tax payments are a good start to protecting yourself. You may also want to use our Max Defend product, offered during checkout when you file your return with TurboTax, for some extra help in case you were audited.

Best of luck! 

Thanks,
Sean