I work as an editor and copywriter for a public relations company, and while I get paid full time, my current payment plan forces me to pay quarterly estimated taxes. This is quite a bit more complicated than having your taxes automatically taken out of your pay check, especially for someone like me, who is still relatively new to the “real” world.
So with tax season upon us, I thought I’d take a moment to outline a strategy that can help you save money to pay your taxes if you follow a quarterly tax regimen.
1. Determine how much money you need to pay every three months. This is the most complicated part of paying estimated taxes. I have an accountant who takes care of all my tax stuff for me, but if you are more mathematically skilled than myself, here is how you do it as outlined by William Perez:
The easiest method for calculating your estimated payments is to divide last year’s unfunded tax liability in four, and then make estimated payments using this figure. To do this, look on last year’s tax return and find your total tax liability. Then subtract any withholding you expect to pay in for this year. If your withholding will be about the same as last year, you could subtract last year’s withholding amount. The difference is the amount of tax that needs to be paid in through estimated taxes to avoid a penalty. [click above link for more information]
2. Analyze your budget. How much money are you spending every month? Do you have the ability to pay your estimated taxes every three months? If not, in what areas can you cut back your spending so that a portion of your paycheck goes toward your taxes?
3. Pull the money you will use to pay your taxes from your paycheck immediately. As soon as the money enters your account, transfer your taxes into a separate account, NOT your savings account. The money you use from savings should come from the income you have left over after you account for your taxes. By putting your tax money into a completely separate account, it’s as though it never existed at all, and that should help reduce the “sticker shock” you face when you have to pay your taxes every several months.
4. Make any adjustments needed to your budget or to the amount you pay in every quarter as needed. The good thing is that you don’t have to stick to a certain number every quarter, so if you are hurting for money in a tax month, you don’t have to pay in the full amount you planned. As long as you pay it all by April 15, you will be fine.
Does anyone have any extra tips for paying estimated taxes?