"That's a x#$% rip-off!" I shouted.
"Why do I have to pay 40% in taxes on the amount I earned extra this year?!"
That's how a recent conversation with my own accountant went this past week. My accountant was surprised I reacted that way. I'm sure he was thinking, "Please don't shoot the messenger."
Needless to say I was astonished, worried and damn angry. I barely made about a fraction more than last year. On that amount the federal, state and local taxes amounted to 40%! I'm still in shock as I write that percentage!
Taxes are painful for everyone, but the self-employed get a special kind of tax hell.
While it is true there are a ton of tax breaks for the self-employed, we still are responsible for all the Social Security and Medicare taxes. It's not unusual to pay 40-50%. Then top that off with having to pay for your own benefits like health insurance and retirement....it's enough to make you want to work for someone again.
Not to mention, imagine having to guesstimate what you'll make every quarter of every year. Then, you have to estimate just how much money to put aside for quarterly taxes. The real cherry on top for me this year is that I did all this, and I still owed a bazillion bucks! Well, maybe not that much. It sure feels like it though.
So what can a self-employed person do to make taxes less painful?
1. Get obsessed with making estimated payments. I thought I was. However, I lost a tax credit for tuition this year that was $2,500. Those are painful. Make sure you set aside a percentage of your pay on every check. Don't screw around with this. You'll regret it come April. My suggestion is try to overestimate. If you overestimate, and you have enough for your taxes in April, any left over money you can use to fund your retirement, retire debts or add to your emergency reserves.
2. Talk with your accountant at least once mid-year. I would highly recommend you have a June or July phone conversation with your tax pro. That way you can share how you've progressed at half-time. It will give you enough time to make adjustments. This probably should be done when you make each quarterly estimated tax payment. Make sure you are talking with your accountant about any tax credits or deductions that may disappear. (It's happened to me two years in a row!) It cost me a ton of dough.
3. Save the money somewhere other than your bank account. What I suggest here is placing your tax payment money somewhere that you can't raid it every time you need money for something. You don't want to dip into this money for bill paying or just cash flow purposes. Use an online savings account tied to your business checking. Transfer that percentage of taxes over there every time you get paid.
These are just suggestions that usually help me. But sometimes taxes can just get away from you. Unfortunately, when you're self-employed this is your problem and nobody else's.
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