I couldn’t have said it better myself. But I haven’t always been on top of my tax game, and old mantras aside, I learned this fact the hard way.
When I first started picking up side work, I still had a full-time job. In the land of W2’s, taxes are taken out before you even get your money. I didn’t even know what quarterly tax estimates were. My tax liability for the side money was low enough that my returns every year would cover whatever I owed. Easy peasy.
But when that side-work grew into a full-time job all its own, no one ever told me that the tax liability would grow into such a large sum of money, and quick. To “prepare” for taxes, I pulled some random number out of my nether region and set it aside each month. (If I didn’t find anything else to spend it on.) I didn’t take it seriously, and when my tax bill was handed to me that year, I almost hit the floor. I had acquired a couple of years worth of debt, was behind on my estimates, and needed to dramatically increase what I’m saving each month. Ouch!
Now, as this tax season has come and gone, I actually got money back this year! I paid off my back taxes and threw the rest at this year’s estimates. Want the same success story? It’s not hard to do, just takes a little planning and effort.
Where does that magic number to send in come from? Well, at a minimum you need to be sending in 90% of your tax liability for the year. Oh, you don’t have that number handy? Luckily there are a few tools online that can help.
Form 1040-ES: The IRS provides a worksheet you can run through to calculate your estimated tax liability and the stubs you mail in with each of your payments. I try to be as conservative as possible in what I think my write-offs will be.
2014 Tax Estimator: A good calculator I found to give you some rough numbers quick.
Now you’ve got your number for the year. Divide that by four and that’s the amount you need to send in each quarter. But I take it a step further and find out what I need to be saving each month.
I use the supremely wonderful YNAB (I could go on and on about these guys, but I’ll save that for another day.) to stash away my tax money each month into a fund I never touch. So when the quarterly due date rolls around, that money is there and ready to go. Whether you use YNAB or not, put that money away each month so you don’t have to think about it.
The only sure thing in life is death & taxes. While you can’t set a reminder for death, you can set reminders for taxes. They happen the same time every year, give or take a few days for the due dates falling on weekends. But generally, it’s April 15th, June 15th, September 15th, and January 15th. My reminders ping me a week before and day of.
Not everything goes as planned. Sometimes you make a little more one quarter and a little less the next. If it’s flucuating drastically, I tend to use the online calculator above to get my adjusted amounts and work from there. Remember, you’re shooting for a minimum of 90% of your tax liability to avoid penalties and interest.
You know the amount, have been putting it away each month, and the reminder just went off. Now comes the easy part: Put the estimate stub and check in an envelope and drop in the mail. Look at you! You’re doing it!
Now that I’m on the other side of the hump, I wish I had someone telling me what was up so many years ago. So if you’re starting out and your side work income is growing and growing, congrats! But there’s a storm a'coming, and if you’re not prepared, it’s going to wipe you out. However, if you get ahead of it now, you really can make April 15th just another day.