One of the most important things you can do if you are self-employed is to pay your quarterly taxes.
When you work for “the man,” your taxes are automatically taken from your paycheck. Your employer, using the information you provide your W-4, withholds tax from your paycheck. Then your employer sends it in to the government on a regular basis. You don’t have to do it yourself.
Things are different, though, when you have self-employed income. You don’t have someone else managing your tax payment to the government. Instead, you are responsible for your taxes entirely. If you want to make sure that you don’t find yourself in trouble come tax time, you need to pay quarterly taxes.
Setting Aside Money for Quarterly Taxes
There is a formula for figuring out how much you should pay each quarter. However, the IRS also provides you with the option to just pay what you paid the year before. This is easiest way to go about paying your taxes — although if you make more money each year, you will owe something extra come tax time. But, as long as you pay 100 percent of what you owed the previous year, you won’t be penalized.
I like to take my total tax liability for the year (including what I owe in state taxes — you don’t want to forget what you owe to your state) and divide it by 12. So, if you owe $6,000 in taxes each year, you will want to set aside $500 a month. It’s the easiest way to go about it. Each month, when your money comes in, put aside your tax amount in a high-yield savings account. Then, each quarter, you can pay the government what you owe.
Find out the policy for state. In my state, for instance, there is no provision for quarterly payments. You can send in money as you like. I usually just set aside the requisite amount as part of my overall tax liability, and let it earn interest all year. Then, when April 15 rolls around, I can pay my total state tax bill. (With the federal taxes, of course, I have been paying quarterly throughout the year.)
Another strategy that can work well is when you have a day job, or if you have a spouse with a day job. Part of our planning is to have extra money withheld from my husband’s paycheck. He is an adjunct professor at a university, and so receives a W-2 each year. We withhold a little extra from each paycheck of his in order to help us cover any increase in income that might be the result of high earnings on my part.
That way, we aren’t stuck with a big tax bill. I have a friend who basically uses his wife’s part-time income to pay taxes. They take a huge withholding, and he doesn’t have to worry about paying quarterly taxes at all since it’s all taken care of through his wife’s paycheck.
No matter how you decide to do it, it’s important that you spread out your payments so that you aren’t caught in a tough financial situation as a result of a big lump sum owed to the government.
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