My friend and I are both self-employed and we were discussing our income tax plans. The IRS will charge me a penalty if I wait until the end of the year to pay my taxes. That’s because my income taxes aren’t automatically withheld and paid to the IRS when I am paid (that’s a benefit most employees have). I have to plan for those payments on my own.
Here are some planning tips:
Pay quarterly on your own using a 1040-ES
One way to do this, is to save 35% of your earnings each month. Then you pay that amount to the IRS using a 1040-ES form. That amount should cover you so you don’t owe any taxes at the end of the year.
Pay quarterly through an accountant
If you don’t want to bother with a 1040-ES and you feel that 35% too high, you can work with an accountant who will help you pay the correct amount of taxes based on your income and all your current deductibles. Most accountants will send in the payment for you. Having that appointment with your accountant may help keep you on track.
Avoid penalties and quarterly payments (only if you are married)
Have your spouse increase his or her withholdings to cover your income taxes. My accountant offered this solution to me years ago. The IRS considers my husband and I to be a “household” because we file a joint return. That means he can cover my tax payments by having them withheld from his paychecks.
How do you do this? Have your accountant estimate out how much you will owe for the year, then divide that that by the number of paychecks your spouse receives. Have your spouse increase his withholdings by that amount.
Meet with Your Accountant in October or November
One thing that you have to do in the last quarter of the year is to make sure you’re on track. If I am having a great year and making more money than the year before, I need to plan ahead and possibly make a tax payment to adjust. Yes, this takes a little more effort, but you won’t owe a big lump sum of money to the IRS come April 15. And, if you’re going to owe money, you’ll want to know ahead of time so you can rein in your spending over the holidays.
If you think any of these tips will help your situation, have a discussion with your accountant and discuss the pros and cons.