157 - Calculating Business Tax
On this episode I dive into a detailed example of how to calculate your business taxes in the third and final episode of my business boot camp.
Example: Elle graduated college this year and went straight into her photography business. Her business made $25,000 and she had business expenses of $7,000. Elle paid $100 in student loan interest (adjustment). She had no itemized deductions.
To calculate Elle's tax percentage:
Calculate net business income = Business income - Business expenses
Add in any other income. In this case, Elle does not have any but this is where you would add in other job income, spousal income, rental property income, etc.
Subtract adjustments to get AGI (Adjusted Gross Income) = Net business income - Adjustments
Elle does not have any itemized deductions which means she will only deduct her standard deduction ($12,200) in order to get her Taxable Income. = AGI - Standard Deduction
To calculate her income tax, she is in the very first income tax bracket. We calculate 10% of her Taxable Income. This is her Federal Income Tax.
We calculate Self-Employment Tax as 15.3% of her Business Profit.
Add your Federal Income Tax and Your Self-Employment Tax together and that is your total Federal Tax Percentage.
To check your answer listen to this episode of the podcast where we break down the calculation.
Now, the question is do we actually have to be paying taxes on a quarterly basis? The answer is that you need to save the money for your tax bill, even if you don't need to pay in quarterly installments. Since you are saving the money anyway you might as well pay it. No one wants to owe a lot of money or risk being fined at the end of the year.
It's important to estimate the tax you owe. Use the example we just used for Elle and set that percentage aside for all your business income and then we take the total amount you set aside that quarter and pay that.
Calculate your own percentage, come up with a comprehensive cash flow system to save the taxes along with paying your business expenses and yourself. To help you out I have a quarterly tax estimation guide. Available in my Facebook group.