Tax Trap: Estimated Payments Can
Catch You Off-Guard. How To Cope ...
By Kristin Delfau, EA
Delfau Tax & Financial Services
Now that we are in the thick of tax season, I want to have a little chat with you about one of the more painful aspects of being a self-employed voice talent: estimated payments.
In the U.S., we have a “pay as you go” tax system. As in, “Every time you get paid, there it goes to the IRS.”
When you are a traditional employee, every time you receive your paycheck, taxes are automatically taken from them each week.
However, when you are self-employed, usually there is no paycheck. So you have to make estimated payments based on your income.
HOW IT WORKS ...
Estimated payments are a way for self-employed people to pay their taxes on a quarterly basis.
This helps them avoid being penalized when tax time arrives, and it is time to “settle up” with Uncle Sam.
Estimated payments are based on four quarters’ worth of income, and are due on:
STILL, NASTY SURPRISES
If you are using your own tax software, it should calculate these payments for you.
But you may still get caught off guard if your income changes drastically from year to year, or if your income is lumpy (i.e. you may not earn anything for several months and then have 90% of your income arrive in November and December).
Here are a few ways to help offset nasty surprises come tax time.
1. Adjust withholdings if you are an employee at a company separate from your voice-over work. Have more taken out of your regular paycheck to cover your estimated payments from your voice-over work.
Then you may not even have to worry about estimates throughout the year.
2. Set aside money every time a check comes in.
If you know that your usual tax rate is 30% (25% federal and 5% state, for instance), each time a check comes in, automatically set aside 30% into a “Tax Funds Only” account that you create.
You might use an online savings account strictly for this purpose. Then, when it comes time to pay your estimates, you will have the funds available and will not have to scramble or worry about where the cash is coming from.
3. Annualize your income on your tax return. This means using Form 2210. It allows you to report your income as you when you actually earned it.
For instance, if you made 90% of your income in December, you want to be able to report it that way. This reduces your chances of penalties for underpayment for earlier in the year.
4. Don’t forget about the states!
If you are a CT resident, for example, you will most likely owe CT income tax. If you are receiving income from a NY source and going into NY to work for them, you are going to owe NYS tax.
Depending on where you work, live, and your business’ “nexus” your state taxes might offset each other so that you are not double-taxed. But remember - states are much nastier with their penalties than the feds.
ABOUT KRISTIN ...
Kristin Delfau is the president of Delfau Tax & Financial Services in Danbury, CT and the author of Turbo-Mom’s Guide to Saving Money Without Wasting Time (Aji, 2009; www.turbo-mom.com). She specializes in flat fee tax preparation and life insurance solutions for individuals.