I am a sole-proprietorship with myself as the only employee. I am basically a sales contractor and I need to 1099 myself. Is there a way to do this and pay the SS and Medicare in the process of filing? They have not been paid up to this point and I want to make sure all the required payments are taken care of. Thanks for your quick response out there!!!
No need to 1099 yourself. As a sole proprietor, you report your business revenue and expenses on Schedule C of Form 1040. During that process you end up calculating the net SS and medicare owed. That amount gets added to your total tax liability.
What you need to make sure is that you've paid estimated taxes on your projected net income during the year. There is no break out what is SS and medicare or income taxes being paid. The amount is remitted as a lump sum.
The calculations are based on your net income, so if your business had a loss for the year, no taxes would be due.
If you have an employee (as opposed to a contractor) you really need to pay them under an EIN associated with your business and not your SSN. It is very easy to apply on-line at IRS.GOV and you really can do this yourself.
Then it gets a little complicated. There are a variety of forms that are needed to submit the taxes you’ve withheld from the employee’s paycheck as well as the business’ payroll taxes. Depending on the amounts involved and the state you are in, the payments could be due with each paycheck, monthly or quarterly. You are best off using a payroll service.
As a sole-proprietor you don’t pay yourself as an employee or a contractor (you could be an employee if the company is a C or S corp). When you take money out the business, that is not an expense, it is a draw (reduction in capital).
What you need to do is estimate Federal and State taxes on a quarterly basis based not on what you take out, but the income – expense on the schedule C. That amount (income – expense) will end up being your taxable income for which you’ll owe Income and FICA taxes. This gets a little tricky as your personal exemptions and deductions are part of the calculation and your income may go up or down each quarter for the quarterly estimated payments (again at the federal and state level).
A short cut to not having to pay an underpayment penalty would have been to take the amount of taxes (not what you had left to pay but the total taxes) on your 2009 return, divide that by 4 and send that amount in each quarter. This works well if your income is somewhat stable from year to year.
For clients who have ups and downs income, we look at the results of the quarter and annualize that, apply the personal exemptions and deductions and send 25% of the tax due on that amount. Yes, that means yes quarter’s payment is different, but despite what the instructions seem to say, I have never had an issue with a client making four un-even payments.
Hopefully this helps. And I would love to get input from other accountants as to the methods I use for calculating the estimated taxes and to learn if they do anything else.