Running a salon or working as an independent hair stylist brings its own set of challenges, and one aspect that can often be overlooked is managing taxes.
Whether you're a salon owner or a freelance stylist, understanding and meeting your estimated tax obligations is crucial to staying on the right side of the IRS. The guidance below breaks down the basics of estimated tax payments to help you navigate this often-confusing terrain and keep financial affairs in order.
What are Estimated Tax Payments?
Unlike traditional employees who have taxes withheld from their paychecks, self-employed individuals, including salon owners and independent hair stylists, are responsible for paying their taxes throughout the year. Estimated tax payments are quarterly payments made to cover income taxes, self-employment taxes, and any other taxes owed.
Who Needs to Make Estimated Tax Payments?
If you are self-employed and expect to owe $1,000 or more in taxes when you file your annual return, you are generally required to make estimated tax payments. This applies to salon owners and independent hair stylists who are sole proprietors, partnerships, LLCs, or S corporations.
Calculating Estimated Tax Payments
Calculating your estimated tax payments can be a bit tricky, but it generally involves estimating your annual income and working with a tax professional to apply the appropriate tax rates. One approach is to use last year's tax return as a starting point and adjust for any changes in income or deductions. To calculate your estimated tax liability, you can use IRS Form 1040-ES, which provides a worksheet to help you determine the amount you should pay each quarter. Keep in mind that if your income fluctuates throughout the year, you may need to recalculate your estimated payments to avoid underpayment penalties.
Setting Aside Funds
One common pitfall for salon owners and independent hair stylists is not setting aside enough money for taxes and it can be challenging to avoid using every earned dollar to cover business expenses or personal needs and also save for taxes. A good practice is to set aside a percentage of received income for taxes.
Utilizing the Electronic Federal Tax Payment System (EFTPS)
Enrolling in the Electronic Federal Tax Payment System (EFTPS) may make the process smoother. EFTPS allows you to make electronic tax payments directly to the IRS, providing a secure and efficient way to fulfill your tax obligations.
Avoiding Underpayment Penalties
The IRS imposes penalties if you underpay your estimated taxes or make late payments. Staying proactive and estimating income and adjusting quarterly can help avoid these penalties at the end of the year.
Understanding and managing estimated tax payments is a vital aspect of financial responsibility for salon owners and independent hair stylists. By staying informed, setting aside funds regularly, and utilizing tools like EFTPS, you can ensure that your tax obligations are met without unnecessary stress or financial strain.
Catching Up on Past Due Taxes or IRS Penalties
The IRS offers many collection alternatives for businesses and individuals that cannot afford to pay their past due taxes in full. These collection alternatives include submitting an Offer in Compromise, entering into an Installment Agreement, or being placed into Currently Not Collectible Status. In addition to offering collection alternatives, the IRS provides penalty abatement under circumstances through the First-Time Penalty Abatement and Reasonable Cause Penalty Abatement programs.
Not sure where to start? Contact Azarvand Tax Law at (410) 698-4005 or book a free consultation online at AzarvandTaxLaw.com
About the Author: Tina Azarvand is a tax attorney who became interested in the ERC and helping businesses face tax controversies with the IRS and local taxing authorities. In 2022, she was selected to the SuperLawyers: Rising Stars List and the Best Lawyers: Ones to Watch List. She also was also selected as Young Volunteer of the Year by the Maryland Volunteer Lawyers Service.
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Originally posted on Salon Today