Don't Give Away Your Hard Earned Money!
Greetings, Wealthy Affiliate Family!
I trust all of you in the United States had a blessed Thanksgiving holiday and that the entire WA family are feverishly working your online business to close out 2024 strong.
A few weeks back, I posted a blog on business entities that one may want to have when earning income that is not taxed. For example, if you earn $100 and deposit it into your account, there is a tax liability for that income.
Since I am a big fan of small business and the need to have a side hustle or a main hustle, I enjoy sharing what I have learned over the years.
Here's the post I shared a few weeks back on doing business in the United States:
https://my.wealthyaffiliate.com/howardjaros/blog/which-online-business-mistake-will-you-make
A few questions were posed on that post that I would like to address.
The first was based on a statement in my blog that read: "Remember, if you are an online business owner who does not have taxes deducted from income gained from a W-2 type job, and you have a significant income gained through your business, you must pay taxes quarterly, or you may incur penalties for tax underpayment at year's end."
A great question was asked by @Daverh: "Are the quarterly taxes based on sales tax collected or gross income generally, and at what point should payments be started?"
Let's explore that further.
1. What Are Quarterly Estimated Taxes Based On?
Quarterly taxes are required for federal income tax and self-employment tax (Social Security and Medicare).
They are calculated on your taxable income, which is your gross income minus deductions and expenses.
The sales tax collected is not part of your income if you sell a product. It's money collected on behalf of the government and must be remitted to the appropriate tax authority.
2. When Are Quarterly Tax Payments Required?
After subtracting your withholding and refundable credits, you must start making estimated tax payments if you expect to owe at least $1,000 in taxes.
Typically, this happens once your business earns consistent income and you do not have taxes withheld through another source (e.g., a traditional job).
3. Deadlines for Quarterly Payments
The IRS requires payments on these dates:
April 15 (for income earned January–March)
June 15 (for income earned April–May)
September 15 (for income earned June–August)
January 15 of the following year (for income earned September–December)
4. How to Calculate and Pay Quarterly Taxes
Estimate your income and expenses for the year.
Use IRS Form 1040-ES to calculate the estimated tax.
Include:
Income tax is based on your tax bracket.
Self-employment tax (15.3% on net earnings up to a certain threshold).
You can pay online through the IRS website, by mail, or using the Electronic Federal Tax Payment System (EFTPS).
5. What About Sales Tax?
Sales tax is a separate obligation handled at the state level.
As an online business owner, you are responsible for collecting and remitting sales tax to the states where you have a tax nexus (e.g., physical presence or significant sales activity).
Remember!
Start paying estimated taxes as soon as your business begins generating taxable income.
Track your gross revenue, deductions, and expenses meticulously to ensure accurate calculations.
Consult a tax professional to understand specific obligations based on your business type and location.
Another great question was asked: "As an S-Corp, who handles the extra administrative duties?"
As an S-Corp business owner for two entities for a combined period of twenty years, I have employed a reputable CPA firm to handle all the administrative costs of operating my corporation. It's well worth the money to do so. A good CPA will save you money and assure you don't make a mistake that could cost you money down the road.
And I will address one last question: Can an LLC or S-Corp business be run from a residence, or do you have to set up in a commercial zone?
Yes, an LLC (Limited Liability Company) or an S-Corp (S Corporation) can generally be operated from a residence. Still, several factors must be considered, including zoning laws, homeowner association (HOA) rules, and the nature of your business.
Running an online business out of one's home should be no problem for those strictly running an online business with no need for exterior advertising, accepting client traffic, or a retail sales operation, considerations more appropriate for a commercial location.
Here's wishing you a profitable close to 2024 and many tax deductions that you can take because of your online business. Don't give away your hard-earned money! A business entity can help you with that.
In the next edition, I will discuss what kind of tax deductions you might be missing.
So, are you running your business as a Sole Proprietor, as an LLC, or as an S-Corp? Do you think you need to?
Please feel free to leave a comment below!
Recent Comments
4
Thank you for answering these questions, Howard. I appreciate the recommendation to use IRS Form 1040-ES to calculate the estimated tax.
When the time comes, I will start with a sole proprietorship and talk with an advisor about moving beyond that.
Dave
You are welcome, Dave! A Sole Prop is a great way to start. Be sure to use Schedule C when doing your taxes to take advantage of any business deductions you can.
An LLC or S-Corp for incomes of 40k or more will allow greater tax advantages of reducing your adjusted gross income.
I am glad I can offer some useful information. That's the great thing about WA: we all come with different talents that we can share with each other.
More great information! Thanks, Howard. I'm writing these things down.
I'm far from 40k, but I'll get closer this year.
See more comments
Hi Howard,
I remember this journey well with several S and regular companies, those dates still ring in my ears with a degree of pain.
But I must mention that the IRS has a nice side too, when I took the hit in 2008 they were very forthcoming with my total rebate of $837,000, still didn't save the day, but it did help.
Rob