The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
When I first met with my CPA in 2014, we did my 2013 taxes and I got a stack of estimated tax vouchers for 2014. I mailed those off at their respective times, and paid a total of $2,859 in estimated taxes, to match the numbers on the vouchers.
I began to suspect, as we neared the end of 2014, that I might owe more in taxes than $2,859. My freelance income was consistently rising and I kept hearing other people say “you have to pay 20%, or 25%.” I knew $2,859 was not quite enough to cover 20% of my 2014 income.
So I told myself: “Nicole, in First Quarter 2015 you are going to put aside some money for extra taxes.” When I met with my CPA in February, he said “it looks like your income went up, so you are probably going to owe some extra taxes.” If I had a Magic 8-Ball, it would be jumping up and down and screaming “All signs point to extra taxes!”
Well, now we know the actual number: $8,302 total, or the $2,859 I’ve already paid plus $5,443 by April 15.
I often present myself as the pluckiest person around; people have compared me to Kimmy Schmidt, which I’m all um, no, but I get why they’re doing it. Secretly, I’m not always plucky. When I got the email with the $5,443 number I curled up in a fetal position on my bed and stayed there for a few minutes.
Not because I couldn’t afford to pay the $5,443 — I knew a number was coming in my direction, and so I had been stacking money in my checking account instead of trying to pay down my debt more quickly — but because there was another number in that email.
That number was $1,000 per month, and it’s the number my CPA recommends I set aside every month for 2015 taxes. $1,000 out of my $5,000 monthly income.
Now, just to be clear, I think taxes are great. I’m happy to pay my share. But sometimes you can get a number like that and think “wow, that means I’m going to have to spend the entire year staying in the same place.” Metaphorically, in the “I won’t be able to build up my savings” context, and literally. If I put $1,000 per month, or 20% of my pre-tax income, toward estimated taxes, I might not have enough money to move into a better apartment.
The emphasis is on might, and I’m going to spend some time this week figuring out what I actually can and can’t afford. I’m going to look at this budget again and figure out what changes when I put $1,000 in the “taxes” column.
I also know that these numbers don’t really mean that I owe $5,443 on April 15; these numbers mean that I owe $8,443, because real tax and three months of estimated tax are due on the same day, which is come on, completely unfair. Stagger those dates by a month or so, feds! So I’ll also be spending some time looking at when my invoices are likely to come due and whether I’m going to pay the full 20% estimated tax burden on April 15 or, like my CPA suggested, pay a lower estimated tax now and catch up later.
(You aren’t penalized for underpayment of estimated taxes as long as you pay what would have been the previous year equivalent. So I could pay my 2015 estimated taxes as if I planned to earn what I did in 2014, even though I’m guessing that I’m going to earn much more than that, and make up the difference at some point before April 15, 2016. I’m clearly not a tax professional, so talk to your own CPA if you’re curious how something like that might apply to you.)
This post originally appeared on The Billfold.
Image: iStock