Tax Season is Over: Are you reeling from the bill?
Tax Season is over: Some are now waiting on a refund; others are reeling from the bill. The least fortunate filed an extension and continued the agony.
I'll send out a note to you that are waiting on a refund next week
For those of you that are reeling from the bill, a few questions:
Is this the first time you have had a big tax bill? Do you know why you owed this time? What are you going to do differently to avoid this situation next year?
For some, the answer is relatively straightforward. Go to your HR representative at work, adjust your w-4 (withholding) to set aside enough to cover the shortfall next year.
The self-employed have things a little more complicated. I suggest that if you are self-employed, it is worth it to have someone help with your taxes. (unless you are self employed as a CPA or tax agent0.
They will likely estimate your next year's taxes for quarterly payment. At the very least, they can help you arrive at an estimated percent of earnings you need to set aside for taxes. This number can vary based on your business legal structure and deductions, but many fall around the 25% to 30% range. If you have no idea what you need to be setting away for next year, start with 30% of gross profit until you have a better estimate.
In any event, you should develop the discipline to set aside the cash you will need to pay your taxes. A separate savings account is a great place to hold the money. Do not keep it in your business checking account and definitely don't keep it in your personal checking that you use to buy groceries.
I'm not a CPA, or a tax expert. If you need help preparing or estimating tax liability, you should contact a tax expert.