If you've recently made the switch from W2 employee to 1099 contractor, you may still be struggling with the reality of quarterly estimated tax payments and full responsibility for FICA payments. Even if you're earning a higher hourly rate than you did as an employee, you may feel that you have less money in your account at the end of each month—and being hit with a hefty tax bill (or penalties) when you're accustomed to getting a refund can be an even bigger sting. How can you get ahead of these expenses while setting some cash aside for fun? Read on to learn more about some budgeting analyses and tips that may help improve your self-employment cash-flow issues while avoiding trouble with the IRS.
Determine your ultimate tax liability
Before you'll be able to work on a feasible tax payment plan, you'll need to have some idea of what you'll owe. It can often be worthwhile to collect as much information on your gross receipts and business expenses as you have handy and plug this information into a simple tax calculator to get an idea of where you stand.
Checking up on your taxes a few times a year can give you a good amount of lead time if circumstances change and your current tax payment plan is no longer feasible.
Perform a "top-down" budget analysis
For the self-employed, business and personal budgets can often have a great deal of overlap. Accordingly, it's important to know where your money is being directed in both arenas and make adjustments as necessary.
By listing your expenses from largest to smallest (and including your tax liability as an expense), you'll be able to see exactly where most of your money is going – and whether it's large fixed expenses (like your mortgage or rent) or the "latte factor" that seems to be squeezing your budget.
Decide whether paying a penalty is worth it
If your first income tax return as a self-employed person included an underpayment penalty, you may be horrified at the thought of being penalized by the IRS. However, paying a penalty isn't always a sign of money mismanagement, and in some cases can even be a strategic move.
Depending upon the amount of the penalty that you'll be assessed and the impact on your cash flow of quarterly estimated payments, you may be better off keeping this money in your business coffers for an extra quarter (or two) to help you avoid interest charges or overdraft fees, or to tide you over until the slow season subsides. If the potential benefit to avoiding estimated payments exceeds the amount of the penalty you can be charged, opting for a penalty can often be a wise business decision.
For additional help, contact a CPA like Heller David.
Share24 February 2017
Accounting is the absolute most important element of running a business. If you mess up the bookkeeping even the slightest bit, the entire business could be in trouble. I know how costly a small bookkeeping error can be. About three years ago, I made a seemingly small mistake in the financial records for my business and the next year when I filed my taxes, things were very bad for me. What would have required a small tax payment had suddenly turned into a big tax bill and quite a headache. Since then, I have worked with an accountant and things have been better.