A weekly look at Wyoming business questions from the Wyoming Small Business Development Center, part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.
By Cindy Unger, WyomingEntrepreneur.biz business adviser
"As a new business owner, what taxes am I responsible for on the income I earn?" Sarah, Casper
Individuals that are sole proprietors, partners or members of an LLC (limited liability company) compensate themselves by taking a "draw" out of their business. The draw is your income from self-employment and has no taxes deducted by the company.
Individuals must pay estimated taxes personally on any income of more than $399 not subject to withholding. The federal government has a "pay-as-you-go" policy and estimated taxes must be submitted on a quarterly basis. Included in estimated taxes are both income and self-employment tax (social security and Medicaid). Small business owners who do not submit enough tax to the IRS by the due date of each payment period may be charged penalty and interest, regardless of whether a tax is owed at the end of the year.
The amount of estimated tax to deposit each quarter is usually based on an individual's earnings for the previous year. As a new business owner, you probably had no previous self-employment earnings. There are, however, some rules that can help you determine whether you should be making quarterly estimated tax payments.
Generally, you have to pay estimated tax if you expect to owe at least $1,000 in taxes, after subtracting your withholding and tax credits or if you anticipate that the amounts that are being withheld are less than 100 percent of the total tax paid on the previous year's return.
If you or your spouse receives wages from another business, then you can avoid paying estimated taxes by asking the employer to deduct more tax from earnings. To do this, you must file a new Form W-4 with the employer. A special line on that form is provided to enter the additional amount to withhold. If no tax liability last year was noted, you do not have to pay estimated taxes this year. Even if you are not required to pay estimated taxes quarterly on earnings from the business, you may owe some taxes at the end of the year.
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http://www.wyomingentrepreneur.typepad.com/blog/.
The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, e-mail wsbdc@uwyo.edu or write 1000 E. University Ave., Dept. 3922, Laramie, Wyo. 82071-3922.
