Tuesday, March 31, 2009

30-Day Economic Stability Challenge: Setting up quarterly estimated taxes

It's well established now that I don't have the saving gene. But I've done some things to trick myself into saving. One is to set up ING accounts for important things like savings and taxes.

The second is to pay quarterly taxes.

I know a lot of people groan at quarterly taxes. It's bad enough to have to pay taxes once a year--but four times? Here are the advantages:
  • It forces you to stay somewhat up to date on your savings.
  • It gives you a warning every few months if you're living beyond your means: If you don't have enough money to pay quarterlies, you may be overspending.
  • It gives you a concrete warning that you're underearning: Can't pay quarterlies because you're not earning enough? It can be a good kick in the butt to get you earning so you can make up for it next quarter.
  • It relieves you of the insanity of trying to scrape together thousands of dollars in April if you haven't saved for it before then.
The other reason is you get penalized if you don't do it. This year, the penalty is 5% of your estimated taxes due, if you earn more than $1,000 from your business this year. So it's really worth it. I don't know about you, but I don't have extra money to give the IRS. Do you?

So how do you set them up? The easy answer is that you hire an accountant and he or she figures it out for you and sends you invoices to pay on April 15, June 15, Sept. 15 and Jan. 15 (or thereabouts).

Set it yourself

Go to the IRS Web site and download the 1040ES form. It includes a worksheet that will help you figure out how much you expect to earn to you can determine how much should be included in each payment, and it includes payment vouchers you can fill out yourself and send.

Don't leave it to chance

Most important, don't assume you'll remember to pay. Write it on your calendar and pin the vouchers to a bulletin board or someplace else you will see them regularly. I write it on my planner a few days before they're due so I don't have to get caught in the rush.

Photo by Paul Keleher.

1 comment:

Tara said...

Heather, thanks for this series. It has been really helpful.

Another tip: Set up an account with the Electronic Federal Tax Payment System at www.eftps.gov. You can make estimated quarterly payments online and even schedule future payments. You also can make payments at any time, which is good for someone who gets, say, a $10K check and finds it burning a hole in his pocket. Just go online and pay the government its share right away.

It's extremely convenient. No more vouchers, no more snail mail.