Yesterday I mentioned the need to classify equipment purchases and other types of asset acquisitions differently for tax purposes even if you are using cash basis accounting. It’s still early in the tax year so I think it would be wise to talk a bit more about taxes.
When you were working as an employee, and maybe you still are, you had a certain amount of taxes deducted from your gross pay. These deductions might have included federal, state, and local income tax, FICA, Social Security and Medicare and were reported to you and the government on form W-2.
If you have been hired as a contract worker it’s likely that no taxes were withheld from your income and the full amount paid to you would be reported on form 1099-Misc after the close of the year. If you are selling your work to the end user you are also liable to claim the income as taxable income also from which no taxes were withheld. If no tax payments are made to the government throughout the year you could end up with a hefty tax bill and penalties to boot. To prevent this you will make estimated tax payments that can be calculated using form 1040-ES. To learn more about making estimated payments go to http://www.irs.gov/businesses/small/article/0,,id=110413,00.html. Payments can be made through the EFTPS system as often as weekly so long as the full amount estimated to be owed for the quarter is paid by the due date.