As an opening into our Tax Series, which should last us through to the actual Tax season and prepare us all for what to expect and how to prepare, I would like to address one of the most commonly asked questions by many people who are Self-Employed: “How much money should I set aside for taxes?”.
The reason this question is always asked is because everyone gets a broad answer, there really is no set answer. But let me share with you the advice I have heard time and time again and my experience. Accept that you will not get a specific answer from anyone. Not even a Tax Adviser can tell you a guaranteed number to set aside. But they can be pretty close- so be sure to ask if you are in doubt or concerned!
Why is it so difficult to know how much money to set aside?
Because there are so many factors and situations that effect your income taxes. From your number of dependents, write-offs, other family contributions, earnings and other factors that can change throughout the year.
So where do I start?
The most common piece of advice you will find is to set aside 30% of each check. This is a good number for most people, some may find they owe a little more, many others find they get to keep some or even all of that money come tax time!
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What happens if I do not set aside enough money?
If after you file your income taxes you realize you did not set enough aside, the IRS will want you to begin making quarterly advanced payments. If you owe a $1000 or more and expect your situation to stay the same, the IRS will REQUIRE you to make quarterly payments. The process of setting up your payment plan will be completed for you by your tax professional, even the online software will walk you through it.
I have children, do I really need to set aside 30%?
Yes, until you are sure, set aside 30%! However, there is a good chance you will not owe, depending on your state, number of children and more. But always be prepared.
I just cannot afford to set aside 30% of my earnings!
I think the obvious response is you better figure out a way or you could be very sorry this tax season! If you can squeeze out enough to consult a tax expert’s advice, you may find out you can set aside less and be safe, but if not, I would be very careful!
I am not qualified to give tax advice!! So be sure to follow your tax consultant’s word over mine! I am simply sharing with you what I have learned with my experience and research. Laws also change regularly, so information could become outdated.
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