The IRS considers you as a self-employed individual if you operate a business as a sole proprietor or as an independent contractor or if are a member of a partnership.
Because self-employed individuals typically are not being paid regular wages by a company that will handle personal income taxes and Social Security and Medicare taxes, small business owners are required to pay make estimated quarterly payments.
To determine how much quarterly tax to pay, you must calculate net profit — or net loss — from the operation of your business. If your revenue exceeds your expenses, the difference is the net profit. Self-employed individuals will report this income on page 1 of Form 1040. (If your expenses are more than your income, it is a net loss that you can deduct from other money you might have earned and are reporting to the IRS.)
How Do I Make My Quarterly Payments?
Form 1040-ES, Estimated Tax for Individuals that contains a worksheet and is used to figure out quarterly taxes. Business owners generally refer back to the prior year’s that annual tax filing to estimate a payment figure. Form 1040-ES contains blank vouchers that can be used to make the estimated tax filings. Payments can also be made via the Electronic Federal Tax Payment System (EFTPS).
Entrepreneurs in their first year naturally cannot base their filings on the previous return. In this case, they must make their best estimate of the amount of income they expect to earn during the year. If your estimated earnings were higher than reality, just complete another Form 1040-ES worksheet to refigure the estimated tax for the next quarter. If you underestimated revenue, simply recalculate your estimated taxes for the next quarter.