Mac Willet, a CPA in Charlotte, North Carolina, says, "If you're a self-employed unincorporated business, you'll probably be required to make quarterly estimated payments, because, unlike the paychecks from your employer, taxes won't be withheld on what you've earned." You can estimate the amount by using what you made in the first quarter of the year as a baseline. Another method is to pay 100 percent of the tax shown on the prior year's return. No one wants to overpay, but underpayment can be costly. According to Willet, the penalty for underpayment of estimated taxes is based on the short-term applicable federal rate plus 3 percent, adjusted quarterly. Between 1995 and 1997, the rate fluctuated between 8 percent and 10 percent.
Self-employment taxes are paid at a rate of 15.3 percent of net earnings from self employment (what you make after specified expenses) up to $68,400 for 1998, and at a rate of 2.9 percent on any amount over that. Fortunately, half your self-employment taxes are deductible against gross income as a business expense.
Keep accurate records of all your expenses. Without written records, you may not be able to take advantage of all possible deductions. For certain expenses, such as automobile, travel, entertainment, meal and home office, special recordkeeping requirements and limitations exist. Talk to your tax advisor for specific information.
One key to success in your homebased business may be the "time vs. money factor." At first glance, paying an accountant to figure your estimated taxes may seem like a waste of money. But if it takes them an hour and it takes you a day, couldn't you have made more money talking with existing or potential clients? The key to financial success in your homebased business is thinking like a big business: Do what you do best, and get others to do the rest.