In less than a week, the 2013 tax season will be behind us. Many, if not most, people have already filed their taxes, and some await a refund. Others have waited until the last minute and will end up waiting for hours on line at the post office next Monday, April 15th. This post is for those people.
The No. 1 reason why people wait to file their taxes: they’re disorganized. In the past organization was not a big issue. Traditional employment means having your taxes withheld and having just a W2 form to submit. You could submit that on April 15 with no issues — you could even fill out your taxes the day they’re due. But with modern realities that has become tougher.
We’re earning money from more sources today than in the past. Most of that income comes from contract work, which requires a 1099 form. Taxes are not withheld for contract workers, so you have plenty to account for. It’s easy to see, then, that disorganization can only hurt you when it comes to filing taxes.
The best advice is to start working now for 2014 tax season. Here are a few tips.
1. Start paying quarterly
While everyone files a tax return that is due on April 15th, everyone also pays taxes quarterly. Or, at least, is supposed to. When you work for a traditional employer, you have taxes withheld from every paycheck. Once a quarter your company remits those taxes to the IRS. Contract workers are expected to pay taxes on the same schedule. Failure to do so results in interest, which can bump up your tax bill considerably.
Filing quarterly is not always possible for contract workers, particularly those who have just started. It is imperative, though, to start paying quarterly as soon as possible. Otherwise you’re just throwing away money. And why would you want to supply the IRS with any more money than they require?
2. Start saving more
When you work for an employer, your income is predictable. Every two weeks you’re issued roughly the same paycheck. Since your taxes are automatically deducted, you have little to worry about. You have predictable, tax-deducted income. Most W2 employees don’t need to worry about paying taxes. In most instances they overpay and are issued a refund at year’s end.
Creating additional savings produces two effects. First, it gives you some wiggle room come April 15th. Maybe you overpaid and are due a refund, but it’s just as likely that you’ll owe some money. Second, the world of contract work involves plenty of income uncertainty. Creating additional savings will ensure that you have cash when you need it, and not when your contract pays out.
3. Keep records
Yes, the companies you do work for are required to keep records. Before February 1 they’re also require to send you any necessary tax forms. But that doesn’t mean they do this. If you do work for small businesses, you’ll find that they often don’t comply with these regulations. Yet you are still responsible for submitting those forms on time.
In a pinch, you can self-report income. To do that, though, you’ll have to keep meticulous records. Using a spreadsheet can work, but accounting-specific software such as QuickBooks will make the process much smoother — and will protect you better in case you get audited. It might cost you a few dollars, but it could potentially save you plenty of headaches.
4> Stay on top of your finances
One key to ensuring that you’re handling taxes properly is to know your financial situation. If you’re spending close to what you earn, chances are you aren’t putting aside enough for taxes. That can become a problem when your quarterly invoice comes due, and a gargantuan issue come April 15th. The easiest remedy is to simply monitor your finances.
Personal finance software such as you’ll find at Mint.com makes for a great and simple way to stay up on your money. Just input your bank accounts, plus credit cards and other liabilities. It will automatically check them and give you an overview of your financial situation. You can also view an number of stats and graphs that can give you a good idea of where you stand. It’s a simple measure that will keep your finances at the front of your mind.
5. Estimate your taxes
Unpredictable income means your income situation will change constantly throughout the year. You’ll want to know, at any given time, what you’re going to owe, even if it’s a rough estimate. Thankfully there are easy tools to do that. Taking care of this now, and then once a month, will make your tax life much easier.
Here is a simple tax calculator that you can use at any given time. Don’t input what you’ve already made, though. Instead, constantly update your yearly income estimation. Run it through the calculator once a month and get a new view on how much you’ll owe. That way you can get on top of any potential over- or under-payments before they become a problem.