Will I have to pay a penalty for taxes if I didn't pay in all year?

Probably, but it will be a little more painful than you might think. It depends. You can also still do some things like pay estimated tax for the last quarter.

Almost certainly you will have a penalty, but depending how you feel about money, it probably wont be awful. They usually assess you a penalty and charge you interest on the taxes you should be paid.

Your real problem and possible advantage is you're self employed and in your first year. What that means is that you are actually operating a small business and you will probably have to file schedule C.

There is an upside and a downside to being self-employed. You may not know this, but everyone who is self-employed is subject to a self-employment tax in addition to income tax. What that tax adds up to is the Social Security Tax and Medicare Tax that you would have paid -- and you're old employer would have paid.

That tax amounts to more than 15 percent off the top of your gross taxable income. (It is one of the reasons a lot of one person businesses get really riled when a president starts spending Social Security money for wars, oil subsidies, etc. ). Frankly I think that while the tax is fair in terms of social insurance, it would be a good incentive to reduce it by x percent for self-employed earning under x amount and recapture the lost revenue by raising the cap for those earning more than x, up to y. But it's not going to happen because of the ideological wars.

After that tax, which you pay to the IRS for the SSA you will have to pay income tax on the gross taxable income minus deductions (but including SSA). To the extent there's a penalty, it will be based on the tax owed, not some arbitrary astronomical figure.

Here's the good news. As a new and small businessman, you get the privilege of filing tax as one. Who do you think writes the laws. A lot of small businessmen called lawyers. Not all of them work for big firms, so they know what to look for.

You need an accountant, even if the best you can do is one of the H&R block types, at least in the first year. After that you should consider finding a CPA. The costs are not enormous and well worth it. I'm not one, so no advantage for my class. Save ALL receipts even marginally related to your work and keep a daily dairy of anything you do that involves money. Eventually, you'll know what you really need.

Typically, there is a small percentage, I think it's 10 percent, that the IRS allows you to take off the top for operation costs or whatever. It's not a lot, but it helps. Let's say you get 1099s for non-employee income for $100000. Arbitrarily say your taxable income (before deductions) is 90000. Your self employment tax will be $13,500. Your income tax may be about the same. (remember I'm just doing this off the top of my head).

But, let's assume that you have a gross income of $100K and you file a Schedule C. Business P&L is always after expenses and other charges.

It's possible that in setting up that business, you will buy a new computer, a printer and other office equipment. Or a hair dryer or other beauty parlor machinery. You might travel 2,000 miles to pitch a job for someone - and not get it. Or, you might go to a trade show with the hope of making contacts for our business. Some or all of those are legitimate expenses. A startup business sometimes has costs that exceeded its income and you can't pay self-employment tax on a deficit or income tax. (remember if you hire someone, you have pay SSA for them. If you have travel expenses for your work, they are deductible as long as they're not routine commuting.

Whether these costs are depreciated or immediately written off as a credit is by rule. You can get some really useful on taxing information at www.irs.gov/businesses/small/index.html

You may find that you owe little or no tax. FWIW, a lot of people receive 1099s for non-employee compensation. And the IRS will give them a hard time about paying self-employment tax. Self-employment has to be regular and sustained activity to qualify.In your case, since you consider yourself self-employed and plan to be, you are.

The self-employed have some enormous benefits other than writing off business expenses. There are a variety of retirement plans that allow you to defer taxes on much more income than a salaried person. To begin with you can fund an IRA with before tax money and you can do one for our wife if she does not have a qualified pension plan -- even if she doesn't work. It won't lower your self-employment tax, but it will cut your tax bill. You could also in many cases do a Roth IRA -- you'll pay taxes now but not in the future. But the advantage of self-employed is that you can do much better than the limits on an IRA or 401K.

One approach is the SEP which allows you defer taxes on up to 25 percent of your income, currently a maximum of $42,000 for retirement. It's not much different from the old Keough.

But the important thing is that the tax filing system is getting near and you still have some planning to do. You can't really alter your income or outgo with one exception. You can fund your IRA or other Retirement up until April 15 or the day you file your return. You could, incidentally, still make an estimated tax payment for income you think you received in the last quarter and sometimes will IRS will accept that a new business has trouble estimating income for a month before that.

On the retirement question, don't take it lightly. There may be different rules on dates for the best plan. But you can still do something about 2007 even if not as good as you should for 2008. I don't believe i getting too fancy, but a good discount broker or major Mutual Fund Co. can usually do this for you. Invest appropriately for your age. If you're young, you can have a higher mix of stocks to fixed income. I would not invest in individual stocks in that fund. You have more important things in your business to do than worry about them.

If your income is modest, do what's quick and simple. You will say you don't have the $10K in cash. If your tax bracket is 15 percent, the cost of the 10K investment is 8500. And if it's 28 percent, a little over 7K. This is why you need an accountant now to look over what you have. Gather your receipts and everything and get a preliminary look. In a new business, the retirement deduction can lower your initial tax bill to almost nil.

One way to lower that penalty is to reduce what you owe. You've got nearly three months to get this done. And then, you need to project your income for next year and establish a retirement plan that you can keep up. Just remember that if you hire a regular employee, You need to check the rules, but, you'll probably need to dedicate the same percentage to that person's retirement. An accountant can advise you. And you can terminate one plan without close the account and initiate a new one that suits your better.

Another thing you need to do, look at the IRS site, is to apply for a EIN --employer identification number -)immediately. You don't get shot for delaying, but it simplifies the bureaucracy.

So, for now, focus on gathering your receipt and reading the information on the IRS web site for small businesses and the self-employed. If you have other friends who are self-employed, they probably have used an accountant and can recommend one.To my mind, the best are those who specialize in this kind of practice and are well worth it.

You can do some of this yourself, but they can help you manage your cash flows so that you satisfy the IRS, fund your retirement, pay for health insurance and a lot of other things. You usually pay quarterly estimates. And, as the tax laws change, they will let you know how it affects you or not. Should you try to deduct this trip? If your accountant says yes, you're on better ground. Do you need a car to use in business. Leasing or buying? And How much personal use can you make of it? In the old days, a lot of youngish doctors drove porsches or other high end sports cars because they were used as their primary transportation for making their rounds to office, hospital, etc.

Home office? There are advantages and disadvantages. I don't think it's worthwhile for me because it will complicate my eventual sale. But it varies.

Should you buy a computer now, next month or next year. Sometimes it matters. But then if you lease a computer solely for business, you don't have to depreciate it. If you use a mostly business computer, you might consider expensible NAS redundant storage so that you can scrub that leased computer when it's time for a new one. And you can expense that UPS for the NAS and another for the computer.

If you bought any equipment during the past year, you should have the receipts for your accountant.

Anyway, good luck. It's sometimes hard to be a sole proprietor of a business where you're the only employee and there is paperwork. But it can be a lot of fund. There are a fair number of tax breaks built into it once you get past the self-employment tax. And you don't have a boss you hate.

While I find the IRS a pain in the ***, they are capable of being fairly understanding of the problems of stateup businesses. But from here on out, you should be focused on keeping your taxes straight as you go - nothing will kill your business quicker than a big tax problem.

Health insurance. Not a tax issue in this context. But depending on where you live, you can usually get into a group and you talk with your accountant on that and how to reduce your after tax outlay.

Charges for services. If you are earning your income on a sale of your services, either by project or time, you should be determining not just what the traffic will bear, but what you should actually be charging.

Let's say you charge $25 an hour for what your employer paid you $20 for. You're too low. Your rate should be closer to $50 to cover the cost of the business, benefits and the rest. 200 to 250 percent is normal.