HOUSTON BUSINESS REVIEW

THE CPA CORNER: SELF-EMPLOYMENT TAX AND ESTIMATED TAX PAYMENTS
By C. Kevin Moore

Kevin Moore is the Principal with C. Kevin Moore & Associates and has two decades of experience as a Certified Public Accountant. Each week he provides the information you need to grow and protect your business.

Self employment tax is the Social Security and Medicare tax primarily for individuals who work for themselves, similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. Most individual and small business interests summarize their business activity on the Form Schedule C Profit or Loss from Business which result flows forward to the individual Form 1040 U.S. Individual Income Tax Return (Line 12). Generally, the taxpayer owes Self-Employment tax of 15.3% of earnings up to $87,000.

Estimated tax procedures are established to pay tax on income that is not subject to withholding (examples include: earnings from self employment, dividends, interest, unemployment compensation, taxable Social Security payments, etc). In most cases, you must make estimated tax payments if you expect to owe at least $1,000 in income taxes for the year and you expect your withholding and credits to be less than the smaller of: a) 90% of the tax shown on your 2004 tax return, or b) the tax shown on your 2003 tax return, or 110% of that amount if the adjusted gross income shown is greater than $150,000 ($75,000 for married and filing seperately.

The small business owner must use the 2003 tax return as a guide in figuring the 2004 estimated tax. Be sure to consider the current year tax changes, such as: IRA deductions may be allowed even if you were covered by a retirement plan, tuition and fees deductions were expanded, the standard mileage rate for 2004 is 37 ½ cents per mile, etc.

Simple, isn’t it! Get in touch with your CPA early and plan ahead to avoid any potential penalty & interest for underpayment of tax. The penalty is imposed on each underpayment for the number of days it remains unpaid. In fact, a penalty may apply even if you have an overpayment on your tax return.