Dentists, keep in mind that it’s not just self-employed individuals who are required by the IRS to pay estimated taxes.

There are numerous advantages to being self-employed. The top benefit that most full-time, must-report-to-the-office employees most envy the most is your ability to establish your own work schedule. You don’t have the commuting expenses, nor the hassle. No endless meetings with co-workers, and no dealing with office politics.

Self-employment has one major disadvantage, though: the self-employment tax. One of the benefits of being a W-2 employee of a company is, well, the W-2, which documents how much you paid into Social Security, as well as the big chunk your employer kicked in.

Others Owe, Too
But estimated taxes are not just for the self-employed. They’re owed by anyone who has at least some income that isn’t subject to withholding by an employer. For example, if you receive interest or dividends, rent, or income from selling an asset, you are required to pay estimated taxes.

Figure 1: The IRS establishes a payment schedule for your estimated tax payments.

In addition, if you’re not deducting enough income tax deducted from your salary, pension, or other income, you’re obligated to send the IRS a payment four times a year.

This is why it’s so important that you enter the correct number of allowances on your W-4 (and even add an additional amount if necessary) and that you track all income.

Failure to submit enough income tax dollars prior to filing your 1040 – and by the IRS’ scheduled deadlines – will result in penalties, even if the IRS owes you a refund.

How to Pay
The form you use to submit your estimated tax payments depends on what type of business entity you are. If you are a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you’ll need to make quarterly estimated payments if you think you will owe $1,000 or more (after you subtract withholding and refundable credits) or more come filing time. You would use the Form 1040-ES (Estimated Tax for Individuals) to calculate and pay. Corporations should use the Form 1120-W (Estimated Tax for Corporations) if they expect to owe $500 or more when they file.

If you are sending a check or money order, you can fill out and print the vouchers included at the end of Form 1040-ES on the IRS site.

Figure 2: If you are sending a check or money order to make estimated payments, you can use these.

There are multiple ways to pay estimated taxes electronically, either by credit or debit card, or by withdrawal from a bank account. They’re listed here, and they include EFTPS (the Electronic Federal Tax Payment System), a free service provided by the U.S. Department of the Treasury.

As Always, Exceptions
There are some individuals and businesses to whom these mandates don’t apply. Farmers and fishermen, as well as some household employers and higher-income taxpayers have different rules that are explained in the Form 1040-ES instructions.

Also, you’re not required to pay estimated taxes if:

• You were a U.S. citizen or resident alien for all of the previous year, and
• You had zero tax liability for the full 12 months of the previous year.

How to Estimate Your Estimated Taxes
That’s the tricky part, especially if you are self-employed or for some other reason don’t know for a fact how much you’ll owe in income tax for the current year. You can use the previous year’s return as a guide, but there have, of course, been tax code changes since then. And your income and deductions may well be different on this year’s voucher forms found on the 1040-ES page.

This is really an area where you should sit down with us and make a plan. This might involve running monthly or quarterly reports, creating projections, etc. These are good habits, especially if your income is unpredictable. Year-round tax planning will not only help you make those quarterly payments – it will provide a clearer view of your company’s overall financial health.

It’s a very important distinction, and one that can get you in hot water if you misclassify workers even at a dental practice.

Full-time employees of companies often look at independent contractors with envy. They can generally work whatever hours they want. They can sit at a computer, make phone calls, and create products in their jammies if they’d like. They don’t have to make up an excuse to take a mental health day, and they can run errands at times when the stores aren’t as busy.

It is true that self-employed individuals have many freedoms not afforded to those who must show up at an office or warehouse or retail outlet at scheduled hours several times a week. But where income taxes are concerned, that envy goes the other direction. Besides not getting benefits like paid time off, health insurance, and retirement plans, independent contractors bear a much heavier load, as they must kick in the money that employers cover for their full-timers.

The differences in these two types of job status may seem obvious. But even major corporations who have teams of lawyers and compensation specialists and human resources professionals have been scrutinized – and in some cases, penalized – for misclassifying workers. Here’s what you need to know as an employer.

Contractors Contract

There’s a good reason why independent contractors are called contractors: they “contract” with companies to provide services. They work for an hourly or by-the-project rate that’s arrived at ahead of time by mutual agreement. There are numerous types of professions that count independent contractors among their ranks, including artists and writers, doctors and dentists, lawyers, accountants, and, well, contractors and subcontractors.

Contractors, according to the IRS, are part of a larger group called the “self-employed.” This larger classification can also include members of a partnership and individuals who are in business for themselves (including part-time businesses).

When you employ independent contractors, you owe them payment for services rendered. Nothing more. You do not contribute a penny to their income tax obligations. They are required to file an income tax return annually and submit estimated taxes quarterly. They must also pay the IRS self-employment tax (SE tax), which consists of the Social Security and Medicare taxes that are paid by the employer when one is an official employee.

Common-Law Employees
The Internal Revenue Service’s term for an individual who is an official employee of a company is common-law employee. The IRS has established a set of criteria to help employers determine the “degree of control and independence” that exists in the working relationship.

The factors to be considered are:

• Behavioral. Can you, as an employer, control what the individual does and how he or she does it?
• Financial. How is the worker paid? Are necessary expenses reimbursed? Do you supply the tools and supplies needed to carry out the prescribed tasks?
• Type of Relationship. Is the individual entitled to benefits like health insurance, vacation pay, and/or a pension plan? Will your relationship be ongoing? Is the work that the individual will do a “key aspect of the business”?

Figure 1: Need assistance determining whether an individual is an employee or an independent contractor? Let us help you communicate with the IRS.

That seems fairly cut and dried, but believe it or not, it’s sometimes difficult to make a clear distinction. Some factors may point to an employer-employee relationship, while others may signal that the individual is an independent contractor.

The IRS has a very complicated form that you can fill out to determine the status of an individual. If you feel you need direction in this process, let us help you. Doing this incorrectly can lead to problems that you shouldn’t have to face.