The first time I filed taxes as a self-employed individual, I was slapped with a $200 fine. Ouch! I failed to pay in to self-employment taxes throughout the year, and the government decided to teach me a lesson.
Today, I’m passing my tax insights on to you, for free. One key aspect of going into business for yourself is learning how to manage your income, including tax planning. People who work for an employer never have to handle this aspect of working, thanks to an accounting department or tax professional who oversees the business financials.
In the entrepreneur world, we have to strive to make accurate estimated tax payments. For most of us, it’s a quarterly transaction. To stay on schedule, I add this task to my workflow calendar and set aside a portion of my income for taxes each time I pay myself. After chatting with several small business owners, I’ve learned that pre-planning is key, and any overages at tax time are often an uncommon, pleasant surprise.
How Real Indys Tackle Taxes
Let’s dig in. You’ve received a payment from a customer and put it in the bank. Now what? As additional payments begin to pile up, remember, Uncle Sam gets a cut.
Artist and writer Rigel Celeste, the creator behind the Holes in Your Socks blog, is a seasoned business-of-one gal. “I’ve been doing this for a while now, and have a pretty good idea what tax bracket I usually fall into. I’ve found the simplest calculation is to just hold back that percentage every time I get paid by someone,” she explains. “Then, I log in to IRS.gov and make an electronic payment once a quarter or sometimes once a month, and they debit my bank account. Easy peasy.”
Content strategist and writer Erin Ollila is a creative freelance pro with an acute eye for detail when it comes to money management. “Once the quarterly tax dates are released for the year, I immediately double book them into my digital calendar,” she says. “By double booking, I first go in and make an all-day appointment on the day that they’re due, and set up a reminder for one week before that date. I also set up an all-day appointment about 10 days before they’re due, and this is when I usually actually go in and make the payment. The actual date (and reminder) is mostly a backup so I don’t mess up and pay late,” she says.
But what about those of us who don’t always have predictable taxes, and sometimes pay in too much?
Save, Save, Save
When you’re just starting out, it can be difficult to estimate your quarterly tax liability. As your income ebbs and flows, so do the tax payments — and it’s not uncommon to overestimate. So if you do send in too much, yes, you’ll get a tax refund just like traditional employees.
The ladies I spoke to like to tuck that extra cash away into savings or spend it on business needs. “Once the money is set aside for taxes, I like to pretend it isn’t mine anymore,” says Ollila. “When I was younger, tax returns were treated like play money, and I’d try to find a way to treat myself. Now, as I’ve gotten older and much more fiscally sound, I tell myself that any money set aside for taxes is completely gone,” she explains. “When I get a return, it goes right back into savings. I just bought a home this year, so the returns of the past previously went into my home savings account. Now, it’s likely to go into a home repair account or travel with my children.”
Splurge on a Home Improvement Project
While it’s important to save, we all enjoy splurging from time to time. I usually tackle a back-burner home improvement project, since I spend both my work and free time in my home. My last few tax overages have been put toward a basement bathroom remodeling project. One year, my tax refund made tiling the shower stall possible. Another year, we spent the excess on essential fixtures, like a cabinet, light and sink. Little by little, the room is getting finished. Do you have a project that’s been lingering or put on hold? Consider allocating any tax overage to finally marking it off your to-do list. It is possible.
Plan a Getaway
Celeste says she never (or rarely) overpays her self-employment taxes. “I always hold the final quarter payment back until I file my taxes, and send exactly what I owe them at that point,” she explains. But if she does estimates too much, the overage goes toward something fun, like a trip.
Does a getaway sound fabulous? Whether you plan a week at the beach to revive your entrepreneurial spirit, or plan to attend an industry-focused conference in another state to get a jump on your competition, you’re moving your business forward. Relaxation and education strengthen your momentum and drive. So go ahead and book that trip — and don’t think twice about taking time away from your usual duties. Small business owners don’t switch up their change of pace often enough. I can’t count how many times I say, “I need to do that more often,” after an impromptu long weekend away from my desk or spending time at a conference networking with my supportive peers. And remember, if the trip is work-related, it’s a tax deduction. Cha-ching!
Treat Yourself to Something New
I still like to treat myself every once in a while. Usually, I’ll try to combine a refund with a business need, like a new tablet or laptop. This type of purchase benefits the operation of my business and amps up my enjoyment — and patience — level, because it’s new and runs more efficiently. Is there something you could use at your desk to improve your day-to-day workflow? How about a new ergonomically correct chair or novelty docking station for digital devices?
Tax planning can be a stressful time, but there are ways to make it a little more enjoyable. So if you get that big return you’ve been waiting for, don’t feel too pressured to put it into savings. Treat yourself every once in a while to a nice weekend trip, or cool new equipment for your office that’ll make your job run smoother than ever. After all, a little relaxation and a new focus will actually boost your operations and your business-of-one morale. Give it a try next time, and you’ll see exactly what I mean.