The self-employed and small businesses with employees should review their tax withholdings to determine whether they meet the present tax filing standards. Many times, taxpayers receive a rude awakening when an IRS notice arrives, informing them of taxes owed. When the IRS audits tax returns, if they find that the payment received is less than the taxes owed, they will send a notice to the taxpayer for the remaining balance.
A routine check of federal tax withholdings and payments can help small businesses avoid tax debt. The IRS charges a penalty for the underpayment of taxes. If the taxes owed remain unpaid, it will keep charging interest and penalties until it is paid in full.
The self-employed can pay estimated taxes on their income, interest, dividends, alimony, rent and gains from the sale of assets. Estimated taxes can also be paid if the amount of income tax withheld by an employer from income or pension funds is not sufficient.
The self-employed can review their income from all sources, adjustments, credits and deductions, to accurately estimate their tax liability. Those looking to pay quarterly estimated taxes use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to know their eligibility.
Small businesses and self-employed may also consider payment of the Medicare Tax, effective Jan 1, 2013. The 0.9 percent Medicare Tax applies to income for W2 and self-employed individuals, as well as Railroad Retirement Tax Act compensation.
The self-employed and small businesses should review their tax withholdings to keep current with the ever-changing tax code, and to avoid getting into tax debt. Employers must ensure their employees complete Form W-4, Employee’s Withholding Allowance Certificate, to accurately withhold federal income tax from their pay-checks.