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Managing finances as a small business owner can be challenging, particularly when you realize that you don't get to keep all of the money you earn. Unlike employees, small business owners are responsible for paying all of their own Medicare and Social Security taxes as well as the proper percentage of taxes based on their tax bracket. Because you're not having money taken out of each paycheck, you'll have to make these payments in quarterly installments based upon your estimated earnings, and the percentage will vary depending upon how much money you make.
The self-employment tax covers Medicare and Social Security. Employees only pay a portion of this tax, while self-employed people have to pay the full amount. For self-employed people in 2013, this tax rate is 15.3 percent. If you make more than $106,800, any amount in excess of this number is taxed at 2.9 percent, which covers Medicare, but not Social Security.
Your tax bracket determines the remainder of your quarterly tax liability. If you are a corporation, you'll pay corporate tax rates based on your business's earnings. These tax rates range from 15 to 35 percent of your total earnings. If, by contrast, you're self-employed as a freelancer, you'll determine your tax bracket based on your individual earnings or the combined earnings of you and your spouse if you're filing jointly. Individual tax brackets range from 10 percent to 39.6 percent.
When you calculate your quarterly payments, you'll also need to take into account tax deductions, which lower your taxable income, and tax credits, which decrease your tax burden. You can deduct business-related expenses such as advertising and office supplies, as well as employee salaries, most business-related travel expenses and charitable donations. If you don't deduct these items, you can deduct them at the end of the year and might end up with a tax refund.
Even though you're making quarterly estimated payments, you'll still need to file an annual tax return. While your quarterly payments are based upon your estimated earnings, your annual tax return shows your actual earnings. Depending upon how accurate your estimates were, you could end up having to pay more than you've already paid, or you might get a tax refund.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.