Sites like Shopify and Amazon offer an excellent platform for online sellers to sell their products online. While some online sellers are looking to supplement their income with part-time selling, for others it is a full time gig that generates substantial income. Regardless of whether or not you are part time or full time, you will probably have to pay estimated taxes. Estimated taxes are simply part of being self employed, which online selling is considered. Here are some estimated tax planning tips that can make filing your taxes easier.
Since you don’t have an employer to withhold the taxes for you, you are responsible for making quarterly payments to Uncle Sam. For many, estimated taxes are intimidating, however they are really nothing to be scared of. Here are some estimated tax planning tips to make filing your quarterly estimated taxes easier.
Do I Owe Estimated Taxes?
You may be wondering if you own estimated taxes. Estimated taxes apply to most self employed individuals. Self employed, sole proprietorships, corporations, s corporations, and partnerships may be required to pay estimated taxes if they owe more than $1,000 when they file at the end of the year, that is unless they had no tax liability the previous year.
Estimated taxes are paid on a quarter basis. It is important to always pay estimated taxes on time, in order to avoid unnecessary penalties from the IRS. The due dates for estimated taxes are as follows:
- First Quarter – Jan. 1 through March 31: Due Date April 15
- Second Quarter – April 1 through May 31: Due Date June 16
- Third Quarter – June 1 through Aug. 31: Due Date Sept. 15
- Fourth Quarter – Sept. 1 – Dec. 31: Due Date Jan. 15
Calculating the Amount You Owe
This is where things can get a little tricky, as it requires you to look into the future and predict how much you are going to make. The IRS recommends using form 1040 ES to calculate the amount you owe. This involves estimating your taxable income by figuring your AGI (adjusted gross income) minus deductions and credits. You may need to run some financial reports from your sellers dashboards in Shopify or Amazon to estimate your income. Once you have the predicted taxable income you can calculate the amount you will owe based on your tax bracket. In addition to paying income tax, a self employment tax will also be due. This covers social security and medicare, which are normally paid by an employer. However, self employed individuals are still responsible to pay these. This year, the self employment tax is 15.3%. To calculate your payments add the income tax you owe, plus your self employment tax together, then divide by 4. This is how much you should pay each quarter.
Some people use the previous years tax return to calculate the amount they owe for their estimated taxes. To avoid paying a penalty the minimum amount you will need to pay is 100% of what your tax burden was from the previous year. Divide the amount by 4 to figure what the quarterly payments should be. Keep in mind, this is not a fool proof method. You could still end up owning at the end of the year is your calculations are off.
Estimated Tax Planning Tools
There are a couple of things that can make planning for your estimated taxes a lot easier. For starters, using a good accounting software like QuickBooks ,and Xero can make a huge difference. They integrate seamlessly with sales channels like Shopify and Amazon. In addition to help you with calculating your estimated taxes, they can also help you with keeping track of your inventory.
In addition to using the right software, you should set up a separate bank account for your tax payments. This ensures that the funds will be there when you need them. Think of it as your own withholding system. You can automatically transfer a certain percentage to this account to cover your tax liability.
Another thing that makes paying your estimated taxes a lot easier is enrolling in the Electronic Federal Tax Payment System (EFTPS). If you haven’t already done so, you should set this up. The EFTPS allows users to make calculations, may payments, and even set up automatic payments for all 4 quarters. It takes about 1-2 weeks to enroll, so make sure you enroll well before you payments are due.
It is important to make sure you pay the correct amount and on time in order to avoid penalties from the IRS. Working with a professional tax planning expert can help you with your estimated taxes, setting up a tax saving strategy, and also help you identify which deductions and credits are applicable to your business. For more estimated tax planning tips subscribe to our newsletter.