Case Study: Tax Withholding and Estimated Taxes in Accounting

Jane is a freelance graphic designer who recently started her own business. As her business started growing, she realized the importance of understanding tax withholding and estimated taxes to stay compliant with tax regulations. Here's a detailed look at Jane's journey and the key aspects of tax withholding and estimated taxes:

Jane's freelance graphic design business has been steadily gaining clients, and she's starting to earn a significant income. However, being self-employed means that Jane is responsible for calculating and paying her taxes. Unlike traditional employees who have taxes withheld from their paychecks by their employers, self-employed individuals like Jane must estimate their tax liability and make quarterly estimated tax payments to the IRS.

Jane's first step is to understand her tax obligations. She learns that as a self-employed individual, she is subject to income tax, self-employment tax, and possibly other taxes depending on her specific circumstances. Self-employment tax covers Social Security and Medicare taxes for individuals who work for themselves. Jane realizes that she needs to calculate her net earnings from self-employment and determine her self-employment tax liability.

To calculate her self-employment tax, Jane learns that she needs to fill out Schedule SE (Form 1040) along with her annual tax return. The self-employment tax rate is 15.3%, which consists of 12.4% for Social Security and 2.9% for Medicare. However, Jane discovers that she can deduct half of her self-employment tax as an adjustment to income, which helps reduce her overall tax liability.

In addition to self-employment tax, Jane learns about income tax withholding and estimated taxes. Since she doesn't have an employer withholding taxes from her earnings, Jane needs to make quarterly estimated tax payments to cover her income tax liability. Estimated tax payments are typically due on April 15, June 15, September 15, and January 15 of the following year.

Jane decides to estimate her tax liability using Form 1040-ES, which helps her calculate the amount of tax she expects to owe for the year. She considers various factors such as her income, deductions, credits, and tax brackets to arrive at an accurate estimate. Jane understands that if she underestimates her taxes and doesn't make timely estimated tax payments, she may incur penalties and interest from the IRS.

As Jane's business continues to grow, she realizes the importance of staying organized and keeping accurate records of her income and expenses. She sets up a system to track her earnings, deductions, and quarterly tax payments to ensure compliance with tax regulations and avoid any potential issues with the IRS.

Question: Which of the following is NOT a tax obligation for self-employed individuals like Jane?

A) Income tax B) Self-employment tax C) Payroll tax withholding D) Estimated tax payments