Yeeeeeeeessss! You can’t see me, but I’m doing the biggest nerdiest white boy dance right now on top of my desk chair. Jersey Shore style, baby ;) All because I apparently can’t do math properly in my head. (Reason # 387 to stick with a trusty accountant)
That’s right – I literally thought I was gonna lose $20,000 or $15,000, or any other amount large enough to make a grown man cry during tax season. By no means did I get off Scott-free, but we certainly live to fight another day! And with a much better understanding of what to expect going forward too.
The total damage: Option A
Right now, w/out any further action, our total tax bill comes to…. drum roll please… get ready to still be freaked out please… about $9,000! Zing! That includes both federal and state, and everything else we have going on here (like biz stuff in other states). It’s not small potatoes by any means, but again – It’s not $20,000! Which was my default “worst case scenario” based on stupid numbers and just plain ol’ fear. Something I’m very glad existed to help ease the pain a bit ;)
As I mentioned before, I very well knew I was gonna get hit hard this year since my hustles were taking on a form of its own, and there had been no taxes being paid out at all on them. Which was one of the reasons I kept hoarding all my cash like a crazy person (the other reason being the whole “work for myself one day” goal – now obviously being put to use ;)) So the good thing here is that I’m not gonna go in debt no matter which way you slice it. And it also helps with Option B.
The total damage: Option B
My accountant had another surprise in store for me — If I were to invest some money into an SEP-IRA (Simplified Employee Pension Individual Retirement Account), which is used by the self-employed and amazingly enough, didn’t conflict with my maxed out 401(k) AND Roth IRA last year, I could knock down the tax bill even further! $5,000 invested right this second, and counted for 2010, will reduce my payment down to about $7,000 instead of 9.
Hmmm…..um, YES! Force myself to stash away another $5,000 toward retirement, and save $2,000 in the process? It’s a no brainer. I literally went from relieved to EXCITED ;) Not only did I already set aside a ton of money for this tax crap, but then I get to keep and INVEST some in the process! And learn all about a new IRA I wasn’t aware of. Win-Win-Win.
So that covers Tax Tsunami 2010. But the learning doesn’t stop there…
Moving forward…
Nope, I get another little surprise that I have now graduated to quarterly payments. Woopee! I get to think about taxes every 3 months instead of year – my favorite! Haha… I kinda sorta saw that coming, but I kinda sorta ignored it thinking that maybe it won’t come up ;) But I guess the IRS gets mad when they don’t get their money on time… imagine that?
Sooooo, going forward, I must now have a game plan and SET ASIDE X% of my income so that I remain buddy buddy with Uncle Sam. And I already know that % too — a whopping 35%. Yes, apparently when you work for yourself you have to pay quite a nice chunk of Social Security AND Medicare on top of your other %’s – something that seems crazy high since employers usually help cover half of it for you. D’oh. This comes out to 15.3% total (SS plus Medicare). And it kinda stings. But on the other hand, dear accountant says all the benefits of going on your own far exceeds the cons. So we shall see…
All I know is that I’m one happy bastard right now. We “saved” $8,000, invested $5,000, and only had to give up $7,000 at the end of the day. I don’t think I could have planned that one out if I tried ;) And better yet, I can now finally get rid of that nagging feeling in the back of my head! The taxes are done, man. No more wondering “what ifs”…
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(Photo by soukup. Edited by J$)
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That’s great news man. As of right in with my rough math, we will owe about $10,800. I have some work to do though, such as getting the whammy 1099-MISC corrected and get all of my deductions accounted for and I am hoping to also get it down to about $7g’s. That’s sad that’s my “wishful” thinking!
I start to get annoyed when I hear my friends talking about their return, while I dread filing ours. But I look at owing taxes to be somewhat of a blessing. It means that we had all that extra income through out the year, and we are in an “elite” tax bracket (hahhahahha). Can’t hate on Uncle Sam for wanting his share!
That’s awesome news, man. Congrats! Taxes are definitely the WORST part of making money on your own. I am kicking myself because I was in a similar situation last year—I earned a bunch of side income but didn’t pay estimated taxes and had a whopper of a tax bill in April. And I DIDN’T know about SEP IRAs last year. Doh!
In fact, this year I DID pay generous estimated taxes but was still going to owe. Then I did some digging and learned about SEP IRAs and found that if I open one and contribute enough, I can actually get a federal refund instead of owing. Needless to say, I did a nerdy white boy dance, too.
So glad that your tax bill was lower than you planned. The added bonus of getting your SEP-IRA funded and lowering your tax bill further is wonderful! I hope 2011 will lead to bigger and better things with Budgets are Sexy and Love Drop :D
Yes, I’m self-employed too. You absolutely MUST set aside about 1/3 your income for taxes. A SEP is great too. I fund mine to the max every year I can.
I am glad things worked out and you are keeping your head up. 7 > 10 > 20 …errrrrrrrr, something like that, right? ;)
Wow, that’s a big difference. Thanks for mentioning the SEP IRA. Now I can add that to my work notes, for when I might actually start making money on my own…
Depending on how much income your business brings in, it may be time to consider s-corp taxation, as that could save you some money on SE tax.
Also just a quick note: Estimated tax payments aren’t every 3 months exactly. The June 15 due date is just 2 months after the April 15 due date. (Though being one month late really isn’t a huge penalty…)
I love you & your blog…and congrats…
PS – although you paid less than anticipated, you DID pay penalties for not making adequate payments at the time they were due. Paying quarterlies on time and to correct estimate will avoid that in future.
Awesome! And great idea to pay YOURSELF an additional $5k in your SEP-IRA and pay the government less. Another option might be to funnel some of your cash into an HSA (IF you have a high deductible health plan). I just wrote about my own experience on the same topic last week: My husband and I are on the line for about $800 to the feds and initially I was thinking I’d funnel about $5k into my IRA in order to wipe most of that out. Turns out, setting up an HSA is a better option, since we already have an HDHP AND the money we put in the HSA will preserve the liquidity of that money, rather than locking it away in an IRA. Basically, I’m looking at it as if we’ve now got a regular emergency fund AND a health emergency fund.
And we don’t owe the feds money any more!
About time you talked to CPA about setting up some sort of entity to limit your self employment income through “reasonable salary” vs taking profits.
I think there’s a social security tax cut in 2011 – see: http://www.irs.gov/newsroom/article/0,,id=232590,00.html.
It still may be wise to account for that 15.3%, sneak a little extra in to balance out bad math, but you we to be getting a small break this year.
$7k is waaaay better than $20k! I wonder if my brother knows about this SEP-IRA business… He has his own handyman business and never likes to see that final number at the end of the year! But if he can invest some of his money into yet another retirement account and drop his overall payment down, I know he’d be all over it!
Great outcome. I’m filing for the first time as a corporation owner and I’m really nervous.
I am going through this exact same scenario with my taxes. My wife became a full time self-employed worker this past year for the full year. We did not pay Uncle Sam in quarterly payments and I did not tax Self Employment (Medicare/Social Security) tax into full realization. When I saw an extra $6k in Turbo Tax for SE Tax I about passed out.
Oh well, at least we have plenty of money saved for taxes and I’ll definitely have to check out that SEP-IRA
Nice work J. money! You’re going to hate me but I paid zero dollars in taxes this year! I paid my senior year’s tuition with cash, so I got to enjoy the Obama tax credits yah boiiiii!
Ended up getting a tax return of 7k. I was pretty boring with it through, went straight to the Roth and paying half my car loan off.
Man, your taxes are complicated bro!
I’m in the estimated income tax payment game as well. And for another option, I annualize my estimated payments. That means I set aside approximately 30% of my income but I essentially do my taxes every quarter. I’ve gotten so good that even though I missed $1500 in additional income we only owed the IRS $113 this year. Woot! Glad you didn’t have to dent your “working for yourself” fund too much.
Thanks for all the love guys, got some responses for ya:
@sarah – Amen, sister. When you owe a lot of taxes it’s usually because you’ve been blessed with “lots” of money! And it’s not like we didn’t see it coming, even if we did our best to ignore it ;) I can think of a ton more horrible things that come when you least expect it. We just gotta suck it up and continue to work our a$$es off. Hope you get your issue corrected!
@David – Haha, YES! That’s brilliant man, so glad you found SEPs too :) You’re right, not the most glamourous part of the job, but it is what it is and we keep working on fine-tuning that right plan to keep the headaches away. Thanks for sharing bro.
@Elle – Thank you Elle :) You’re too sweet. I hope you have a rock star 2011 too!!
@Diane – I now believe it ;)
@HedgeHoncho – haha, exactly.
@Wade – That’s right — gotta get the plan on track for the big day! :)
@Mike Piper – Very true. I’ve heard the benefits of S-corping.. can’t remember why I decided against it for now, but I’m not taking it off the table for later. We’ll play it year by year :) And good call on the quarterly specifics, yes – forgot already about that, haha…
@kay – Thanks Kay! I really appreciate you being here :)
@Diane – Hello again :) That’s a very good question actually, and I think you’re right. My accountant initially told me I was probably gonna get fined for holding back on all that cash last year, but then she didn’t mention it specifically when we were going over the results… I’ll check the final paperwork once I get it, def. something to consider.
@Alotta Lettuce – Ooooooh not bad, not bad. I’ll talk it over w/ the wifey and see how are deductibles are looking… haven’t had much time to go over our new insurance (it’s through her university).
@Evan – Well, we’re getting there ;) Set up the LLC early last year, but still ironing out the ways to be most efficient.
@Brian @ Be Better Now – That would be nice! And you’re right – I’ll keep padding it and just take it as a nice surprise if it pans out :)
@Mercedes – Yeah, do it! The only way I found out was through my accountant, so if he does his own taxes he may not know about it. I’m incredibly excited, as you can imagine ;)
@Lauryn – Welcome to the club! I hope you get even better knews than I did :) It’s very scary indeed, but you’re not alone.
@Tim Anderson – Freaky, huh?! But the good thing is that we only have to feel that way once :) Now that it’s all over we can plan and prepare for all future years (and quarters). DEF check out the SEP stuff, and make sure if you go for it that you do it before April 15th and put it toward 2010. Unless you want a leg up on 2011!
@Jon the Saver – haha, nah man I can’t hate on ya. I’ve been getting G’s back for years ;) And did pretty much the same thing as you — save/invest that money away! It may be boring to some, but it’s not their lives – it’s yours. You gotta do what you gotta do, bro!
@Andi B. – Nicely done! Hopefully I can get my stuff down like you have, that’s impressive :) And oh yeah – it’ll still be dented, just in a much more peacefully way, haha…
Yes, absolutely there is interest/penalties if you underpay in any quarter. Many self-employed people (such as Mercedes’ brother) wait until the end of the year and tally up then. This is a mistake in many ways. Not only is it harder to be disciplined about budgeting for this big hit, but you pay more as you pay the interest on underpayment. When you work for someone else you pay through withholdings in every pay period. Even then, if you underpay, you are penalized at the time of filing. Same for self-employed people.
All in all it is far better to do your own withholding and set aside X% of every check into a “Tax” account, then draw from that for your quarterly payments.
Yup! That’s the plan going forward. Literally have my savings account labeled “Tax $” too – no more jokin’ around, I gotta get this down pat ;)
Man and I was whining about owing $580, I will now be thankful I ONLY owe $580 :)
haha, well all our situations are different my man – you still have the right to complain ;)
Yahoo! Congrats on being done with your taxes and saving some money for retirement in the process!
I’m trying to do something similar. Woohoo for the IRA!
you got that straight!