Do you impound estimated taxes?

[FreeStar Houston]

I have a question for you folks who operate part-time or even full-time as a sole proprietor.

Do you normally take a certain percentage of your gross receipts and impound them in anticipation of your added tax liability? I've been told by a couple of people that I should take 25-30% from every invoice payment and place it in a separate account to pay the added tax bill next year.

I haven't had to deal with this issue in the past, as I never made enough to matter. This year is going to be different with lots of jobs to do, and the only basis I have for how it will affect my tax liability is from being 1099ed a couple years ago. One 1099 for $1,700 of income increased my tax liability by around $700.

Any insight would be much appreciated.

Thanks.

[Damon]

All I know is that I had to pay twice the taxes on my 1099 last year for some contracted work. How is this supposed to help small businesses again?

[CobyPhoto]

You can make Quarterly payments for your business, just like you would have withholding taken from a regular pay check. If you are entitiled to a refund at the end of the year, you will receive it back or you can have it applied toward next years taxes.

Your option of "impounding" them would wark as well. It would just prevent the sticker shock when it comes time to make the payment!

If your income is all 1099, @ 33% is a good figure. If your income is from a business, then it probably won't be as high as you will have to figure your net income based on expenses etc. involved in the production on that income.

KEEP good records!! The last few people I have dealt with on IRS audits of small business have been individuals that have a part-time income and report losses that offset a primary income over a period of 2-3 years. The IRS call this a Hobby and disqualify those deductions. The burden of proof is on you to show that it is a for profit business at that point. Without good records, you will be very hard pressed to do that.

CJ

[FreeStar Houston]

I made the investment to spend $200 on Quickbooks, which I must say was a VERY good decision. It makes my accounting so much easier, and makes keeping track of inventory, invoices and jobs so simple.

[KyleC]

If you are full time or your withholding does not meet a certain level based on your total income you are required to make ES Payments or you will be penalized. I believe the basic rule is you are required to make ES payments if you will owe $1,000 or more in tax after subtracting your withholding and credits.

This years payment schedule:
April 15th, 2008
June 16th, 2008
Sept 15th, 2008
Jan 15th, 2009


IRS form 1040-ES explains the requirements:
http://www.irs.gov/pub/irs-pdf/f1040es.pdf

more info:
http://www.webtaxcenter.com/f1040es.jsp