Monday, January 28, 2008

Tales From the Self-Employed: Tax Woes

In 2006, I saved about 30% of my earnings, and I ended up with about $3k leftover when I paid my 2006 taxes. Last year, I adjusted that percentage to 20%, because I roughly figured that I’d paid about 22% in taxes. 20% was too low! I’ve done a preliminary, very rough draft tax return [using one of the online services], and I owe about $2000 more than I have put aside.

Ouch.

So, I’m going to up my tax savings withdrawal from my current earnings to 35%, to help cover this added expense. My emergency fund has already recently taken a hit because of my recent spate of unemployment, and while what I currently still have saved would cover the extra tax bill, it would leave my emergency fund at a level I am not comfortable with.

I should also mention that I, recalcitrant that I often am, did not make estimated tax payments throughout last year. Because of that, my tax bill will be a few hundred dollars more… I’ve learned that lesson, and I’ve set the Treasury Dept as a payee in my online bank account and just sent a big wad of cash to them. That payment will help lessen the underpayment penalty I will be assessed.

The lessons I’ve learned from this, is that 1. I will start saving a flat 25% of my earnings, to pay my tax bill (once I’ve saved up enough to finish paying off last year’s tax bill); and 2. I will start paying my estimated taxes on time. When you’re looking at a tax bill over $5000, it’s easy to say “well, it’s only maybe $400 more…” and then just pay the penalty without looking too closely at the amount. However, I could easily use that money to buy a ticket to Mexico in March (I need a vacation, and I want a nice, quiet beach vacation); or I could put it on my debt.

And I’m not one to let the tax man stand in front of a beach vacation. At least, not willingly!

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