It was the worst of times, and it was the WORST of times…

When she came into the office, Sally didn’t have a clue of what she owed in taxes for 2008.

For 2007, she still owed almost $3,000 on net income of $20,000. Last year (2008) she had net income of almost $35,000 and is looking at a tax bill of over $7,500.

Now, Sally is looking at a two year tax bill of more than $10,000 and is already behind in paying her 2009 estimated taxes. Like I said, it was the WORST of times…

Sally has an LLC that receives money for the work she does personally and for a separate health facility. She files one LLC tax return for both businesses as a Sole Proprietor on Schedule C along with her personal tax return, Form 1040.

The business that provides the health care services breaks even…no problem here. There is no tax bill when no money is made.

The income from the work she does personally, however, is taxable.

Self employed people pay estimated tax ahead of time similar to employees paying taxes from their paychecks. The major difference is that the self employed pay the full 15% self employment tax on income (employees pay half of that).

If you work for yourself, and make a profit (more money coming in than going out), you have to pay 90% of your tax bill by December 31st of each year or face a 25% penalty (of the tax due).

Sally has very few deductions against her income. Also Sally hasn’t been paying estimated tax and she is not on payroll. (I’ll explain these terms in a minute.)

You are required to pay estimated taxes quarterly, but you’re allowed to pay them more often.

What is an entrepreneur to do? We have an answer, but first let’s take a look at Rashan.

Rashan is an internet entrepreneur. He knows how to make money on the net.

Unfortunately, Rashan hasn’t been paying estimated taxes either.

For 2007, he had a tax bill of $8,000. When he did his taxes this year (for 2008), his bill turned out to be over $9,000.

He had a payment arrangement with the IRS for the 2007 taxes of $500 per month, but you can imagine how that has to change with the new amount he owes. He is now looking at a total tax bill of over $17,000 and the IRS is adding penalty and interest costs every day.

We now have to go back to the IRS and negotiate a new payment plan. Rashan also has not paid any 2009 estimated taxes this year.

What’s an entrepreneur to do?

Take the Work out of Paying Taxes
Let’s face it – if you’re making a profit, you have to pay taxes. The key is to know what your profit is, and then have an easy way of paying taxes on it.

Paying estimated taxes can be easy if you sign up on www.eftps.gov. Using this site, you can automatically get your estimated taxes paid on a weekly, monthly or quarterly basis.

As much as I try to reduce tax bills for all my clients, I still suggest paying the tax man quickly – more quickly than any of your other accounts payable. After all, you’re not saving anything if you end up late with the tax man and pay unnecessary penalties & interest. (Here’s a hint: the more frequently you send in a payment, the smaller and easier the payments are to handle.)

Payroll is the recommended option. With payroll, you become an employee of your own company. As an employee, you can have many benefits:

Automatic tax deductions
Retirement plan options
Health benefits

We recommend using a payroll company to outsource this work. It’s an inexpensive way to automate a tedious chore. If you’re the only person on a monthly payroll, it should cost around $75 per month.

There are two big advantages to taking the payroll route. The first one jumps right out at you: As an employee, your tax rate is HALF of what it was as a sole proprietor.

The other is that the payroll company pays your taxes as an employee through simple payroll deductions. They also file all the government paperwork, give you a W-2 at the end of the year, and free up your time to do what you do best – run your business.

Your main responsibilities are to “call–in” the payroll and make sure money is in the bank when they access your business account. It’s as simple as ordering a pizza and waiting for delivery.

The payroll company we recommend is www.paycycle.com.

Our experience is that using a payroll company helps you pay your taxes on time, position yourself for other company benefits, and free you up to make more money doing what you do best.

Be sure and sign up for our free newsletter at www.asktaxguys.com. We give more information on managing your taxes and your business