So yeah, I finally found something annoying about self-employment: paying your own taxes! I all of a sudden have a higher appreciation for all those HR departments out there — y’all make it so EASY for us!! :) And even though I knew this fateful day would eventually come, I still have to begrudgingly accept it since it means dishing out *thousands* of dollars only a couple months after cleaning up 2010’s tax mess. Bleh.
But here we are. 4 months into 2011 already (dang!) and the IRS is already looking for its dough and holding me accountable. No more sitting back and letting the “system” do it all for me. Nope – my lazy days of paying taxes are over and they want their money fast!
BUT THANK GOODNESS FOR ACCOUNTANTS!! Without this team on my side whipping a newbie into shape, I’d be in a wee bit o’ trouble right now as I don’t do details well ;) Esp. when it comes to taxes and following hundreds of pages of IRS rule. And just like they warned me 2 months ago, the time has come to put my big boy pants on and officially become a member of the small biz community. Here’s what that means:
- Instead of paying taxes just once a year like normal, I now have to pay on the following dates: April 18th, June 15th, September 15th, and Jan 17th of 2012. Not exactly every 3 months, but still 3 months worth of taxes paid.
- I have to make sure I’m BUDGETING this amount in! A whopping 35% too, which just sounds insane. This means at the end of every month, I need to xfer over a chunk of change into my newly created “tax account” (savings) and make sure I’m on it. I had originally thought I’d just do the xfer every time I received a payment, but that got REAL annoying REAL quick ;) So now I just make 1 lump “payment” into that savings account each month.
- I have an estimated “number” I have to pay each quarter. My lovely accountants (aka “the firm”) used last year’s numbers – along with some tweaks, like taking out my 9-5 salary! – and came up with my “number” I have to pay every 3 months. If anything major happens, we have to re-adjust to make sure we’re more or less paying the right amounts. Of course, any corrections will be made at the end of the year so it’s best we get close now to avoid any surprises. Particularly the bad ones ;)
Okay, so you want to know what that number is? It’s killer! The amount I have to pay now, every 3 months, is… dum dum dum dum… $5,575.00!! (ouchie momma).
It burns your hands writing those checks out too, let me tell you. Even though it’s “normal” and I used to pay every 2 weeks anyways through my employer, I can tell you that is sure doesn’t FEEL the same! :) Instead of doing my civic duty, it now feels like I’m paying for something that I never get! haha… I mean, when was the last time you dished out thousands of dollars? You got a TV or boat or car or something, right? Well not here… I prefer to go back to naive-ville where I’m oblivious to seeing those numbers on my pay stub every 2 weeks ;) Although, I will say – now I REALLY understand how much goes to the gov’t! When you physically take out your money like that, you definitely get a good picture of how every dollar gets broken down. And it’s crazy.
The one thing I have to figure out now, is how to incorporate this into my net worth updates going forward. Every month my savings accounts *technically* go up until the month I have to cut those checks. Which basically means my net worth gets artificially pumped up until it “resets” on tax month. That’s the way I’m currently doing it, and we’ll see how it looks on this next update.
What we could do instead, though, is just cut out that tax $ every month and never add it into the asset column. Which means no increases or major decreases any months going forward – just pure profit and loss. I guess kinda how it was set up before? The tax deal was already taken care since we were only playing with after-tax money anyways, right? At least when it came to cash (401k, etc is a bit different, but you get what I’m saying). So with that line of thought, I should just take it all out of the mix.
I dunno… we’ll give it some more thought and go from there. I kinda like the drama of all the ups and downs – feels more like “real” life ;) In the meantime, though, I think I’ll go find a corner somewhere and cry. You might have a cranky blogger on your hands every few months, this is gonna take some getting used to…
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(Photo by karpidis)
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Yah, quarterly taxes bite.
Wow, that’s a lot of money! I’m sure I pay close to that too but I have my nice HR department doing it for me, love them. When I was younger I used to look at my paycheck and see how much taxes took out and get mad… now I just ignore it for my own sanity!
I owed the government a grand myself and it was miserable writing that check….taxes suck.
Wow. I want your income, but not your taxes.
I’ve heard the same sentiment from nearly everyone who goes from the corporate world to self-employment. It’s amazing what actually writing out the check to the IRS does to your view of taxes. :)
p.s. You could just write off the taxes as an accounts payable item to zero out the savings account.
Ha, Nicely put. This was an entertaining read for a tax issue, these normally put me sleep in about 2 1/2 paragraphs. Well, on the upside, I suppose it’s nice to have a tax problem, that not. Those payments must hurt though.
When you are doing your net worth you could also calculate your tax liability, that would smooth out the ups and downs of the “tax account”.
I think our country would be a different place if everyone had to write a personal check and send in their taxes like this. When people really saw what they pay (or don’t pay) I think they would feel differently about taxes.
And what if I told you that the IRS is a modern day mob and it’s unconstitutional to require US citizens to pay income taxes!? Unfortunately, we still have to pay, otherwise, life is miserable with the IRS breathing down our backs. We should get an uprising going and refuse to pay taxes. What do you say J. Money, you in?
It’s crazy ho much taxes increase with large increases in pay, I feel your pain brotha! I moved down to CA for a corporate job and I was shocked to see state income tax… I was like what the heck is this! I guess i was spoiled up in WA with zero income tax, oh those were the days!
I hate writing quarterly tax checks! I always feel like my hand is shaking with that many zeros after a number!
What you can do is every month just transfer over the 35% before you do the net worth and don’t add it in. That way you would think about it less.
Just put a row for “Tax Liability” in your calculation and it will flow through your net worth just fine. For each month before your tax bill, put $1800 in the liability account to offset the $1800 you were theoretically saving that month.
Yeah, all the numbers in this post gave me a headache. *Now, I’m re-evaluating future career path to NOT be a financial planner–I’ll stick to insurance.*
I think my man Josh might have solved the net worth issue! Love hearing all these ideas though guys, keep ’em flowing :)
@Nicole – Fo Sho.
@Kelly – Haha yeah, I was good at ignoring it too ;) Now? not so much.
@craig – Did you end up adjusting your witholdings to avoid it again? Or you gonna be writing another check this year? ;)
@Kevin @ Thousandaire.com – Haha, if only we could separate it like that. But you know, that does raise a good point – wouldn’t have to be paying so much if I wasn’t making much ;) We can all say the same thing if we’re gainfully employed.
@Wojo – Hmmm… yeah, might have to do that. We’ll see what happens when I run the numbers this month and how I take the shock ;)
@Hunter – Glad you enjoyed it :) I actually re-wrote one of the paragraphs at first cuz I fell asleep myself to it!
@Ashley @ Money Talks – I agree! Same goes if you receive your paychecks in cash! I did that a few times (not on purpose) and holding it and feeling it made soooooo much more an impact than seeing it in my bank account. It was *REAL* money! haha… and I’m smelling a new blog post, thx ;)
@Jon | Free Money Wisdom – HAH! No state tax? Never lived in a place with that perk ;) And I’ve lived in a lot of states! I hear ya on change… you what’s cool about all this though? Eventually we just get used to it and (hopefully) move on ;)
@Robin – Haha… for sure. Maybe we can have a check-writing party so we can all be in pain together? :)
@Rafiki – Yeah, that may be the way to go. Just wondering if SEEING the numbers go up & down like that keeps me more conscious of what the real deal is or not. We’ll see what happens :)
@Josh – Ohhhhhhhh, now that’s an idea. Maybe that’s what you were sayingup there Wojo? I like this. Thank’s man – happy medium :)
@Trinnie – Haha… yeah, it’s funny – most people think just cuz I manage my own money that I’d be good at taxes, other people’s money, etc, and it just doesn’t work that way. I think as long as we *KNOW* what we’re good at, and what we’re not, though, then we’re all set. It’s when we fool ourselves into believing we’re an expert in something when we’re not.
I think creating a “Liability” account is a great solution. Your tax savings is different from just a regular savings account or an emergency fund…if you had to pay taxes monthly instead of quarterly, that money would already be out the door, so it really shouldn’t add to your net worth. For the other accounts, you don’t *have* to use that money for anything, so it is a liquid asset until you spend it.
Good luck with those quarterly payments! I think the rest of us do take for granted that our companies handle that for us. It’s much easier to swallow the tax payments throughout the year if it’s already been deducted from your net paycheck – harder to miss what was never there!
That’s a big payment! It’s tough when it’s in big chunk like that. We pay our property tax once a year and it always hurt to write those big checks to the county.
Yes this is a down side to being self employed but in actuality you make payments to Uncle Sam every pay period when you work for someone else. You just don’t write the check.
Its the self-employment tax that really sucks and adds to the bill.
On the other hand, you’re making a rather nice monthly income!
Welcome to the world of the self-employed! :)
Creating a liability account is the best possible way to handle it. After all, that money is NOT yours. It belongs to the government and you’re just hanging on to it for the time being. I have paid estimated taxes for as long as I can remember (I owned a side biz even in high school) and so paying quarterly is just standard to me. Also paying sales tax. If you ever get into retail sales in a state that charges sales tax, let me tell you that collecting sales tax SUCKS even worse than income tax and SE tax.
For @Jon – the whole “taxes are unconstitutional” thing is a crock. It’s a nice try but it doesn’t float under the real Constitution. The government has the right to levy taxes as they see fit.
Me? I’m all for a flat tax. Charge everyone 10%, eliminate ALL deductions and exceptions, abolish the IRS and replace it with a small electronic based collections department, and … done. It’ll never happen tho. Special interests are allowed to rule our government.
At least you be making around $65,000 a year in gross blog income which ia higher than the average per capita income in the US right? Not bad at all!
But, welcome to the side of small government ad a desire for politicians to be responsible With our money!
Sam
@KH I beg to differ my friend! It’s actually very true. All the IRS is a modern day mob. The government can only tax capital profits from gains. It is unconstitutional to tax income tax due to the fact that you are trading your time for a straight wage. Did you know there is absolutely ZERO laws regarding the income tax?
Now, having said that. Do I pay my income tax? Of course I do. I highly recommend you watch Aaron Russo’s “America: Freedom to Fascism.” I’ll end this convo with a quote: “If the taxpayers of this country ever discover that the IRS operates on 90% bluff, the entire system will collapse’.” — Henry Bellmon, U.S. Senator (1969).”
Sorry @Jon, but you’re wrong. The 16th amendment allows the government to levy taxes. I won’t disagree with you that the powers of the IRS have been overly extended or that the agency functions as mob would .. but Constitutionally, the US G’vt has the right to levy taxes as they will.
@Jenna – Yes! Be thankful and enjoy the laziness too!! :)
@retirebyforty – Interesting, that one gets automated for us so we don’t feel it. Would suck getting hit yet again! Haha… even though it’s all basically same thing.
@Debbie Beardsley – Yeah for sure, I just want someone to do it for me now like it used to be ;)
@kh – Oh man, I can’t even imagine sales tax stuff… bleh… I guess I’ll shut up and just get used to it ;) Good info for sure.
@Sam – True dat. Doesn’t matter whether I’m “average” or not though, just so long as I’m happy w/ my life ;) And oddly enough I am even more so than when making double!
@Jon | Free Money Wisdom & KH – I’ll leave you two alone ;) Enjoying the debate so far though!
@Jon:
Amendment 16 – Status of Income Tax Clarified. Ratified 2/3/1913. Note History
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
Source: The United States Constitution, oft referenced, seldom read.
Sorry, but you’re wrong.
I am allover the idea of have “Taxes” as a line item in the liabilities section of your net worth. I would suggest putting it under “Mortgages”. This way it will be in alphabetical order. You might want to consider putting the assets in alphabetical order. I am passionate about presentation….
My accountant makes me pay monthly so it doesn’t hurt so much. Though typically business owners pay less in taxes. It’s much more complex though! See this WSJ article:
http://online.wsj.com/article/SB10001424052748703696704576222590253291266.html?mod=WSJ_PersonalFinance_PF5
FYI your right nav isn’t working properly and is at the bottom of the page (at least in Google Chrome).
@Rob – Nice find ;)
@Super Frugalette – Haha… I usually like to go in order of dollar amounts and/or what “looks best” visually to me ;) I tend to change wording of the categories and then I’d drive myself crazy re-ordering it all due to alphabetizing! Glad it works out for you though.
@Investor Junkie – D’oh! I know exactly what I did too, thanks :) would have never caught on my own! And I like that idea of paying monthly too – that would certain solve the Net Worth debate!
Yup..it’s a painful check to write. This month I paid state and federal taxes, estimated state and federal taxes for Q1, LLC fees for 2010, LLC fees for 2011. Six checks. I track my net worth as actuals at any point in time. It’s fudging I think to count future credits back.
Oh man, yeah it’s crazy! And you bring up a good point about future credits too… I was thinking more about the money I”m going to pay in the future for certain (quarterly debts), but I suppose at the end of the year it’s possible to get some back too if I overpaid (or if biz didn’t do as well – bleh.) I guess at that point it would be real-time then… there’s never a “right” answer for this stuff, haha…
I always try to overpay a bit. I know it’s better to slightly underpay, but I am fearful of paying to little and hitting the penalty threshold. Plus this year I did a big ROTH conversion, so I’ll owe a whopping big bunch in taxes.
haha yup! there’s that too ;)
Look at the upside – at least you are making the money to pay taxes (sounds like it is a nice amount too, considering that 65% would be around 7K). I hired an accountant, paid her $300 a month to take care of my taxes and payroll. Also I suggest you incorporate as an S-corp and you can deduct a whole bunch of stuff which should bring down your expenses.
Yep, can’t complain about that for sure. I might go the S-corp route later in the year all depending. Right now the LLC is still helping out w/ stuff and I can deduct a lot working from home too :)
Try $12K every three months. I’d take your $5K any day :)
Ok, heres what absolute sucks about quarterly taxes. I pay 1/4 at each payment of what I paid the previousyear so I am sure I dont get hit with penalty. If your income goes down either in one quarter, or year, the payment must be made to avoid the penalty. If your income goes up, then on April 15 of the next year you owe the balance, PLUS 1/4 of the taxes you paid the previous year(thats a big hit). You might say well if you didnt make it you cant pay it, but the IRS considers the year, if you didnt pay the 1/4 in say June and a increase occured in the last quarter, you were underwithheld/ underpaid for the year and subject to penalty. This doesnt include, state, and local income taxes that must be dealt with
@Whitney Hess – Haha… and I’ll take your income in return! ;)
@Dave – Oh man… yeah if you’re trying to scare me it’s working ;) This whole thing is so knew to me, but it seems if I pay the same amount for this year, at least, I’ll be on track – even if I get some back from overpaying at the end. But if I do super well, then I just have to pay more at the end just in 1 bigger clump, yes? Good problem to have as long as I am putting aside that % every time and not slackin’ – which is my main focus right now. That way whenever it’s needed, I have it there in the account no matter what. Only 1 for 1 right now though, so we’ll see what happens the rest of the year ;)
I wish mine was $5.5k. I am paying $8.5k every 3 months. And the bummer thing is that is based off what I made the previous year. This year I am making less but still need to pay the taxes of what I made last year. So in reality, I am making even less this year to put in my checking account. Last year I made less than I made the previous year so I put quite a bit less in my retirement, right? Nope it actually hurt me big time because now I had less of a tax deduction thus paid more taxes than any other year that I’ve been self-employed (10yrs). I am getting it from both sides, actually three: Make less, save less, pay more taxes.
I always set aside a percentage of money from each client’s check to pay my taxes so I’ve never been in trouble paying my quarterly’s but now with making less money, setting aside that money is going to be tough considering my normal bills haven’t changed much.
Found your website because I was googling what happens if you don’t pay that amount the accountant figures I am suppose to pay every 3 months. I can pay some just not all of it….
Anybody know?
@RDF – Oh dang, that sucks – I’m sorry to hear it :( There’s GOTTA be something you can do in this case? I don’t know what happens personally if you can’t make the payments, but hopefully someone here will chime in and help. Have you already asked your accountant? (stupid question, I know, but I’d imagine she/he’d know best! ;))
My website doesn’t make nearly as much as yours does but I should probably start thinking about these self-employment taxes. How do you even do this?
Def. good to watch for! I know there’s a certain amount where you’ll get penalized if you don’t pay throughout the year, but I believe it’s a high one so you may be fine as-is. As for how much to pay/etc, I leave it all up to my accountant :) I hate dealing with all that stuff and she’s always saving me bank in the end so it’s awesome. And when income changes, I just alert her like I did this past week, and she updates estimates for the future.