I’m not thinking this post will make me popular, but honestly, we would be a much happier population next April if we each spent an hour or less reviewing the tax situation now, in July. Here’s why: whether you are an employee on regular paychecks or a business owner (including freelancers, artists and the like), you are always working on an estimate of what your taxes will be for the year.
In the simplest scenario, all of your income is in the form of employee wages. In that case you are relying on how the number you scribbled on to your W4 worksheet (remember that “Enter 1 if….” form?). Sometimes that number works out. But if you got a big tax refund or had a substantial tax bill last year, it means your worksheet didn’t, well, work. If you like the big tax refund that’s just fine – this is essentially an IRS-as-savings-account strategy that works well for some people who otherwise might not save up. Otherwise, you need to go back to your HR person and make some adjustments.
But the much bigger problems arise for people who have any sort of non-wage income during the year: royalties, business profits, large investment profits, rental income, self-employment income, tips, lottery winnings… you get the idea. Even if this is just a “side” income, you are going to have to account for money you take in and, in some cases, the tax deductions (much nicer). If you wait to see how things worked out next April, you will be well past the point of doing anything about it. But, if you check now--in July—you have plenty of opportunity to avoid a frantic, last ditch effort to take care of things in December. More importantly, you avoid the regret in April.
To that end, here is a checklist for anyone who has any sort of non-employee income:
1. Did I get a big tax refund or a tax bill last year?
2. Is my income significantly up or down over this time last year?
3. Do I anticipate an increase or decrease in my total annual revenue over last year?
4. Do I anticipate any big expenses, including payroll, this year that I did not have last year?
5. Did I claim deductions for large expenses, including payroll, last year that I will not be able to claim this year?
6. Do I have a new corporate tax structure this year (i.e. you filed as an LLC or took an S-Corp election)?
If the answer to any of these questions is “yes,” you probably have a tax adjustment to make. This could mean increasing your quarterly tax payments, or it could mean that you over-paying and can keep some of those payments to put toward your regular expenses. Were you planning some big expenditures or new work? Your tax review might give you reason to plan the timing of these a little better. Or you might want to cut down some on the taxes due by putting more into your retirement account. In any case, the best and easiest solution is always to contact an accountant. Believe me, it’s worth it. But if you do want handle things on your own, you will find plenty of tax estimate calculators online and the IRS instructions for estimating taxes here.
All set? Great. You’ve earned another month and a half of beach time and the right to avoid any panic or despair come April.