 Income tax 2022 2023 small business how to pay income tax. Let's do some wealth preservation with some tax preparation support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from the tax guide for small business for individuals who use schedule C publication 3 3 4 tax year 2022. You can find on the IRS website irs.gov irs.gov looking at the income tax formula. We're focused online one that being income. Remember in the first half of the income tax formula is in essence an income statement. Although it's just the outline the scaffolding other forms and schedules feeding into it. When we think about line one we're focused primarily on the schedule C. Another schedule which is in essence an income statement for a business having income minus expenses which we can think of as business deductions getting to the net income that flows into this top line of our income tax formula. This is the first page of the 1040 we're focused online eight the schedule C flows to the schedule one which flows to the first page of the 1040 here. Here is the schedule C which in essence is an income statement with income and expenses. How do I pay income tax. We're thinking about this question from the perspective of a small business owner one that reports on a schedule C. Federal income tax is a pay as you go tax. You must pay it as you earn or receive income during the year. Although most people have probably heard this and are probably paying on a pay as you go system. I don't think this concept really sinks in for many people and when people move from a W to type of employee situation to their own business they are often shocked and don't fully understand this concept in my experience. So let's take a step back here and think about the big picture. We have an income tax type of system that means we're going to be taxed when we generate income. The federal government has incentive to kind of have oversight on the tax that we are paying one way they can do that is to try to be more intrusive and get information about the tax that is being paid. That means that the federal government has leverage over the pay or in a transaction. If you have an employee employee or situation the government has leverage on the employee or the one that is paying because they're the one that wants the tax deduction. So they're going to force the employee or to act as their tax collector. That means that they're not only reporting to the government your wages W2 wages. They're also actually taking the money from you before you receive it withholdings and giving it to the government. Now the government would want that to happen during the year as the year goes through because what they don't want to have happened is that you file the tax return by April 15 of the following year. And then you have this big tax bill that in essence you can't pay at that point. So if the government wants to get paid it makes sense for them to want to get paid during the year at each paycheck you give a piece to the government. That means it's they're more likely to receive their money than if they waited till the end of the year and then you give them all of the money at one point in time. So the problem with this kind of system is that we don't have an easy tax system. If we had just a flat tax type of system that would be very easy to do and you can see that in the payroll taxes which are more simplified flatter type of taxes. We could just say OK it's 15 percent it's 10 percent and in whatever our pay is we multiply it by 15 or 10 percent or whatever and we pay that to the government as we go. But we don't have a flat tax. We have a progressive tax that's combined with a whole lot of deductions and a whole lot of other complexities and credits and whatnot. That means trying to understand how much I should pay out of a single paycheck. When I when I think about how much I'm going to earn for the entire year is quite difficult. So that's why we have the W four form and we try to figure it out. And the goal is to shoot for a refund. We shoot for a refund not because we want to have just money to spend during that time like it's a holiday when we when tax season comes. But because we're trying to avoid penalties and interest by underpaying if we underpay then the IRS is going to hit us not only with the tax we owe. But also with the penalties and interest. That's what we're trying to avoid. That's why the tax tables are set up to overpay a bit because the complexity of the tax code isn't perfect and we can't hit the target. You know exactly. So when people move from a W two type of system when they're forced to do that pay as you go type of system and then they move to a schedule C type of system. Now they don't have anybody that's forced to act as the tax tax collector and and people often don't do the projections to figure out what their taxes are going to be for the schedule C type of business. And they get behind on their taxes. Now there's a few reasons for this. Sometimes people think hey that pay as you go thing the IRS actually kind of advertises oftentimes like the pay as you go system is a system that they're trying to help you out. We're trying to help you out by having you pay you know at every paycheck so that you don't end up paying at the end of the year. It's just something to help you out. And we're going to we're going to we're going to force the withholdings to happen during that time period. But that's not exactly the rationale for it. The IRS wants their money sooner because of one the time value of money. And and two they're more likely to get paid if they take a piece of your pay at each paycheck or at each interval rather than periodically at the end of the year. So it's not a voluntary thing. And it's not like they're trying to help you out really. They're trying to make sure that they get paid and they're trying to maximize how much they get paid. So it's not an optional thing. If you go to a sole proprietor type of business you still have to pay them as you go. The other problem is of course I don't know how much income I'm going to make. It's a new business. Even if it's not a new business my income could fluctuate wildly from year to year. So how can I figure out how much I owe when I have a progressive tax system and I don't have no idea how much I'm going to earn at the end of the year. That's a problem. You got to make a projection for it and you've got to try to figure it out. It's a lot more difficult to figure that out than if you had a W-2 salary situation where you know how much you're going to make. If I know I'm going to make 60,000 this year then I can figure out my taxes a lot more easily than if I have my sole proprietor business and I have no idea how much I'm going to make but I still need to make my estimated tax payments. And I can't just say well look I earned 20,000 in the first quarter so I'm going to pay a tax rate based on 20,000. So you're going to have to pay a progressive tax rate. That means you have to project out how much you made for the year and then figure out how much you would owe based on that projected number in order to get it accurately. The other thing that messes people up is the self-employment tax. When you're a W-2 employee they take out Social Security and Medicare as well and that is more of a flat tax. So when you report on a Form 1040 you don't really have to do any reporting much at all for Social Security and Medicare unless there's a problem. But if you're doing your own business the government wants the equivalent of payroll taxes which is Social Security and Medicare in the form of self-employment tax. That's another huge hit that people are just, it's just not in their mind much because that's just automatically taken out of their paycheck and when you think of the Form 1040 you think about income taxes and people often miss the payroll taxes. So that's some reasons why people get messed up when they go into the Schedule C and if you get behind on your tax payments even if your business is doing well that often is very damaging a start to a business. So keep that in mind. Employee usually has income tax withheld from their pay. So if you're a W-2 employee it's forced to come out of your pay, the employer is forced to be the tax collector and it's done in such a way. This is what I think the problem with our tax system is in a lot of ways is that the government is trying to make things so easy, so automatic so that individuals are all employees rather than contractors instead of having their own business they're going to be employees and then the employers are taking care of the system that people don't fully understand what is happening because they're not actively participating in the system. But at some point you're going to have to actively participate even if you're not a sole proprietor because at retirement then at that point you're going to have to do your own taxes at that time too. So I think that's one of the inherent problems about the government trying to automate everything and trying to be more intrusive rather than having a self-report and an audit system. But that's my opinion. If you do not pay your tax through withholdings or do not pay enough tax that way you might have to pay estimated taxes. So if you have a Schedule C business you might have to pay using estimates because you don't have any W-2 withholdings. So estimated tax payments you generally have to make estimated tax payments if you expect to owe taxes including self-employment tax discussed later a $1,000 or more when you file your return. Use form 1040ES to figure and pay the tax. Now you might say, well what if I don't? What if I don't make estimated tax payments four quarters throughout the year? Well then they're going to hit you with the sticks, what I call their sticks, the penalties and interest. What's your goal for taxes? To pay as little taxes as possible and then pay them hopefully as late as possible too. So if they weren't going to hit me with a stick I would pay them as late as I could just from a cash management standpoint. That would make sense to do if I can manage my cash and pay them by April 15th of the following year. That's what I do but I can't. Why? Because they'll hit me with a stick. I'll end up paying more money than I would have anyways because I'm going to have to pay not only the taxes, they're going to be charging me penalties and interest and my goal is to pay as little as possible. So if you do not have to make estimated tax payments you can pay any tax due when you file your return. So for more information on estimated tax you can see publication 505 if you want to drill down on it in more detail. What are my options for paying estimated tax? You can pay your estimated tax electronically using various options. If you pay electronically there's no need to mail in form 1040ES payments vouchers. So these options include. Now before I go into the options here realize that if you have a schedule C type of business you might be in a couple different scenarios. You might no longer be at a W2 employee and now you have a schedule C business instead. That's your primary source of income. In that case you're almost certainly going to have to make estimated payments unless you're going to run a loss on the business. If you have income that's significant you're going to have to make estimated tax payments in that situation. However you might be in a situation where you have a W2 job and you do some gig work on the side. You're just picking up some side money in that type of situation. Well in that case your W2 withholdings if that's all you have and you don't make estimated tax payments the W2 withholdings are likely not going to any longer be enough to cover the added income you're going to have from the schedule C business. So then you have a choice. You could increase the W2 withholdings in order to cover the added income that you have or you can have the withholdings from the W2 employee and make estimated tax payments for the schedule C type of business. So those are some options that you have when you're thinking about that. So how could you pay them? You could pay them electronically. One, pay electronically through the electronic federal tax payment system the EFTPS. Two, pay with direct pay by authorizing an electronic funds withdrawal when you file form 1040 or 1040 SR electronically. So when you pay your when you file your taxes your tax software you're using or your tax payer software will have that often. Three, paying by credit or debit card over the phone or by internet. If you might pay by credit card I don't think the IRS charges you but the the payment might be charged from the credit card company. So an electronic transfers probably the cheapest way to pay them. If you go on to your account at irs.gov then you can you can pay them pretty easily. Find your electronic payment options if you can connect to your bank. Other options include crediting and overpayment from your 2021 return to your 2022 return. So note that the estimates of your payments become more and more important going forward. And oftentimes it's really kind of sad when people get get behind on their payment. They're paying employees and overpriced merchandise. Because because if they start a new business and it's doing well but then they get behind on their payment what ends up happening is by April 15th when they do their taxes of 2023 let's say for 2022 tax year they're going to owe the taxes and penalties most likely for tax year 2022. And then to get ahead of things because now they got behind on things they need to make the first quarter estimated tax payment for 2023 which is just a killer just crushing them at one time because they didn't they didn't realize the the the significance of the taxes because I think they because when you're a W2 employee oftentimes you're just not thinking about it because you're not actually participating in paying your own taxes. And so it's kind of a shock when you when you have your own business and people often get behind. So so another way if you have a refund coming from let's say your 2022 taxes for example you can either take that refund say give me the money or obviously you can roll it over and say just roll that in to my first quarter payment of tax year 2023. And then you can just pay the difference and keep rolling into 2023. So so it's not too bad as long as you're ahead of things but once you get behind on things then it starts to steamroll a lot of a lot of people. And again even businesses that would have been profitable like they're doing good and then but they just didn't they just didn't you know take this into consideration. They just don't want to believe it. What do you mean I owe all last year and the first quarter. Yeah well it's because anyway or mailing a check money or you can mail a checker money order with a form 1040 ES payment voucher penalty for underpayment of tax. So if you did not pay enough income tax and self-employment tax for 2022 by withholding or by making estimated tax payments you may have to pay a penalty on the amount not paid. That's the point that's what you're trying to avoid. The IRS isn't trying to be nice here. It's like well we're just trying to we're just trying to make you pay as you go so that it'll be helpful to you. So trying to help you know they want their money earlier and they want it to be more likely that they're going to get paid by making you pay them as you earn the money. And if you don't do it they hit you with sticks not literally penalties and interest and we're trying to avoid getting hit with the sticks not literally penalties and interest. So the IRS will figure penalties for you and send you a bill or you can use form 2210 under underpayment or estimated tax by individuals estates trust to see if you have to pay penalty and to figure the penalty amount for more information see publication 505.