Taxes Made Simple

Tamara (fitness instructor) asks:

Hi Mike. I have a question for you. Early this year, I started a business as a sole proprietor. (I'm a personal fitness instructor.) A friend told me that I now have to file tax returns every quarter. I was completely unaware of this. Is my friend right? And what should I do about it at this point?

Answer:

Hi Tamara.

Your friend is very close to right. As a sole proprietor, you only have to file a tax return once a year, but you do have to make tax payments four times per year (roughly quarterly). These payments are known as estimated tax payments. They are calculated using Form 1040-ES.

The best thing to do at this point is to figure out how much you should have paid so far for the year, and go ahead and pay that now. Then make sure to stay current with your estimated tax payments from now on.

By the way, the general rule to calculating what each payment should be is simply take ¼ of last year’s total tax, and make that the payment for each quarter this year.

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