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Sole trader invoice example for Government

hey guys today I'm going to cover everything you need to know as a small business owner about paying quarterly taxes so here's a list of everything I'm going to go over in this video first of all how much to pay who has to pay when to pay your quarterlies and how to pay them and finally just a few more specific notes about how tax brackets work so let's start out with the hardest question how much do you need to pay in quarterly taxes so just to make sure we're on the same page if you're a small business owner and you owe more than a thousand dollars in taxes in a year then you're going to need to make quarterly payments so you're going to need to break up that total amount into four different payments and pay them on specific due dates so in order to know how much you need to pay typically if you had an income last year you're going to look at your income last year and your tax preparer will give you estimates on what you're supposed to pay in quarterly taxes usually it'll be a little piece of paper that say you need to pay 500 every three months in quarterlys so I'm guessing your question is if you don't have a tax preparer or your business did not exist last year how do you figure out how much to pay base basically this will just be a percentage of your income so as you probably know in the US we have tax brackets here is a chart of what they look like and you have to pay a percentage of your income to the IRS the more you make the bigger percentage you have to pay so to estimate how much you need to pay quarterly you can use a really simple formula like this so let's just do it with a really simple example say you open a business this year and you are predicting that you're going to make ten thousand dollars this year so you're going to look at the tax bracket list you'll see I'm in the 10 tax bracket so what you're going to do is simply take your ten thousand dollars times point one which is how you get ten percent and that gives you a thousand dollars that you're gonna owe for the entire year of taxes all right so you know okay I'm gonna have to pay a thousand dollars but I want to pay that quarterly so I want to break it into four chunks so you just divide by four and it's 250 per quarterly payment so that is the simplest way to explain how much you're going to owe as you make more money it's gonna get a little more complicated which is what I'm going to talk about in the last section of that but just as that gen General overview use that formula so when I was first starting out I basically made like a really simple spreadsheet and I put my federal tax bracket and my state tax bracket and made the spreadsheet do calculations on how much I was supposed to save for taxes and you do want to do this on your net income so after all of your business expenses are taken out whatever is left is what you pay taxes on so the spreadsheet's Fairly rudimentary you can make one yourself I think I still have it I'll leave it in the description box if you want to download it but make sure you change the percentages at the top to reflect what your state and federal tax brackets are and remember this is an estimated tax payment so it is not expected to be 100 perfect at the end of the year everything is going to be evened out so if you paid a little too much you'll get money back if you didn't pay enough you're going to owe some money at the end of the year so you don't have to stress about it being totally perfect they know you're not going to be able to perfectly predict your future income I'm also going to link for you in the description box a couple websites that have tax calculators so those should be probably even more accurate than the the spreadsheet that I have there's one that's on the IRS website and then another one you can put in your income and your tax bracket and then it'll spit out information for you this is actually updated version of an old video that I made and I think some of the most common questions I got on that video were what if I haven't made any money yet or what if I haven't made money this year how much do I own taxes so again it's a percentage if you made zero dollars you're going to owe zero in taxes if you made 500 you actually do not have to report that income to the IRS so again you're going to owe zero in taxes and if you're a business owner who's been wanting to get QuickBooks to organize your business I do have a link that gives you a percentage off so check my description box for that and if we haven't met yet my name is Morgan my website is finepoints.biz and my channel is dedicated to help bookkeepers organize their business it really does help me out a lot if you can give this video a thumbs up that helps other people see it and if you want some bookkeeper videos subscribe to my channel for a new video every week if you are a bookkeeper check out my free masterclass and checklist that should help you out that being said I am a bookkeeper I am not a tax preparer so I'm not an expert in this subject I don't know everything there is to know about quarterlies and tax law and I own my bookkeeping business my husband owns a small business so I'm pretty familiar with paying quarterly taxes I've been doing it for like 10 years or so I'm not giving you tax advice I'm just trying to lay out as clearly and concisely my experience with quarterly taxes all right second question is who has to pay quarterly taxes as I mentioned briefly if you are going to owe a thousand dollars in taxes you need to pay them quarterly so you need to break them up and I kind of already did that math for you in that initial equation you could see if you make ten thousand dollars you are in the 10 tax bracket which means you owe a thousand dollars so logically if you make less than ten thousand dollars in annual net income you won't have to pay quarterly taxes you'll still have to pay taxes on that income but the IRS doesn't care if you pay it throughout the year you can just pay it at the end of the year hopefully we're on the same page that if you're a W-2 employee like working for a company like working for Starbucks or something you're not going to need to worry about paying quarterly taxes it's only if you're self-employed and it will depend a bit on your business structure so check with a tax preparer if you have something quirky going on but basically sole Proprietors llc's s corporations they all have to pay quarterly taxes and then if you're a corporation it's a little bit different I think you have to pay quarterly even if you owe 500 in taxes not that thousand dollar threshold if it's your very first year in business you're probably wondering like I have no idea if I'm gonna hit that 10 000 annual income amount so you don't know if you're supposed to pay quarterlys and in that case I would just say do the best you can I know it does seem kind of overwhelming and complicated I would probably just take each quarter as it comes and kind of evaluate so first quarter oh I made a ton of money I'm gonna you know save ten percent and pay it in quarterly maybe the next quarter you lost money and so don't pay anything that quarter and again it's going to equal out at the end of the year it is possible that you can get a small fee for not paying the right amount of taxes which brings me to my next section is how to avoid those fees and so the first thing I want to encourage you with is don't stress about too much I think I got a few once and it was like 37 so yes we want to try to be as responsible as possible but I don't think that the IRS fee is gonna like put you out of business all right and the second thing about fees is if you did have an income last year and you pay a hundred percent of the taxes that you owed last year here you're not going to be penalized so let's say your business has grown a ton this year and you're gonna owe a lot more in taxes but if you're not that good at calculating it just pay the same amount in taxes as you did last year and you'll be fine so here is exactly how it's worded on the IRS website what I just said so it says you are required to pay 100 of your prior year's taxes or 90 of your estimated current year's taxes if you make over a hundred fifty thousand dollars in self-employment income you need to pay 110 of last year's taxes all right so not sure if that wording was more confusing but hopefully I explained it well enough and my third thing I want to tell you to avoid a penalty is pay on the due dates so that is my next section when do you pay quarterly taxes I will put a screenshot on here of all the dates that quarterly taxes are due you can see quarter one is due April and then June September and January so the kind of tricky thing about January is you can pay your quarterlies in January and then you know if everyone knows April is tax time right so April is your your tax deadline that you're going to have to make up the whole year but if you do that in January then you don't have to make that last quarterly payment so does that make sense you can either pay everything in January or you can split it up into January and then finish it off in April next question is how to pay quarterly taxes so I find it easiest to go to the IRS website I'll put the website on the screen here and you can make an account in there and it's really nice because you can make all your payments there and as long as you're logged in it's going to show your your payment history as well so because probably the end of the year your accountant or whoever is preparing your taxes is going to ask you what quarterlys did you make this year like how much have you already paid in taxes and so if you have this you can just look at all your history within there and the way that they identify you is either with your EIN that's your business employer identification number that you have when you start a business or your Social Security number before I discovered how easy it was to pay taxes online my tax preparer used to send me this little form and I would mail in a check the official IRS form is called a 10 40 es you can download it from the IRS website I'll leave the link in the description box but if you're doing your payments online you really don't even have to worry about that form at all so two questions that I think you might have within this category is should you pay your taxes from your business bank account or your personal bank account and my answer to that in most cases double check with your tax preparer is it does not matter so when I started my business I was an LLC and that is what is called a pass through I believe and so that means my personal taxes and my business taxes are the same I'm taxed on how much my business makes so if it happens to be easier for you to pay from your business bank account like if you have that's where you have all your cash sitting to pay taxes make sure when you're on QuickBooks you're categorizing as an equity account because it is it's your personal Equity that's coming out of your money your personal money if you were confused about that and you did it wrong as an expense maybe you had taxes as a business expense hopefully your tax preparer was able to catch that and realize okay this is is taxes it's an equity account if you're an LLC and you know it's not actually an expense to your business and then the second question I was getting a lot is about catching up like what if you're it's halfway through the year and you're a little behind in your taxes or if you want to pay ahead or something in my experience that is fine I don't find that the IRS is too picky as long as you're kind of like doing your best to be honest and pay as taxes as accurately as possible if you want to use like that September payment to catch up a little bit that's fine and a little bit more about how tax brackets work so as you're probably familiar in the US we have seven tax brackets again here is a list of how much they all are it depends on how much money you make and the percentages get bigger as we make more money and something that took me like a minute to grasp is that if you are in one of the higher tax brackets you're charged at multiple rates so here's like a super simplified version that I'll use to explain it so let's pretend in this fantasy world there are four tax brackets 10 20 30 and 40 percent of your income obviously these are very small amounts for this illustration but if you make a hundred to two hundred dollars it's ten percent 200 to 500 you go up to the next one thirty percent tax bracket is starts at 500 and then if you make over 700 annually it is you're in the forty percent tax bracket so let's pretend your annual income was one thousand dollars again this is numbers you can't just take that thousand dollars and take forty percent and that is the amount of taxes you owe because different steps of your money is charged differently so your first two hundred dollars is only charged at ten percent and then your next three hundred dollars I think I have is charged at twenty percent and then the next chunk is charged at thirty percent so you're actually going to owe Less in taxes than if you just took forty percent of the total so you can see your total is charged at different rates so again this graphic is from a website called nerd wallet that I'm going to leave link down below and they've already done the math for you so if you look at the tax owed column let's go into the middle like let's go into the 24 tax bracket they've already calculated that the tax is up to 89 000 is going to be 15 000. I'm using round numbers here and then anything you made above 89 000 is going to be taxed at the 24 rate so if you are beyond the first tax bracket and you're getting into the upper ones use that taxes owed column as like the starting point and then you're going to have to add a little bit to it if you're super confused just leave me a comment down below but if you are getting into these higher amounts it's definitely worth it for you to hire a tax professional to do your taxes well and I also got a couple questions about the self-employment tax rate I am not super knowledgeable about this so you probably want to go to a tax professional I will read you some research that I found and that's the self-employment tax rate is 15.3 percent about 12 of that is for Social Security and a little under three percent is for Medicare don't forget to give this video a thumbs up up if you learned something I really appreciate that and subscribe to my channel I will talk to you again next week with a new bookkeeper video thanks