Thursday, August 20, 2009
You don't have to be a math whiz to figure out estimated taxes.
My name is Pete, from Boston, MA. For the past few months I've been freelancing as a web designer.
I've had a hard time finding the right information on estimated taxes. Basically, I've been just about scared away from continuing my freelance business and feel like cutting my losses, wiping my hands of this and finding a job that will give me a W-2.
The bottom line is: I've made about $10,000 total since I started freelancing in May, and I know I need to make a payment by September 15th. But I simply do not know how to figure out what amount I should be paying - even though I've researched endlessly (as you may have guessed - I'm not a math whiz). All the information out there on the web and in books seems to direct me to last year's taxes - 'take your adjusted gross income from last year, and...' - but I don't see how that's relevant at all when I just started doing this in May (also, I was a student most of last year).
Also, I can't figure out if my wife's income (she's a public school teacher) should come into play when estimating my tax payment.
I've spoken with a couple of accountants through personal contacts of mine, but I haven't gotten far on free advice. I've wondered if I need to just pull the trigger and hire an accountant to help me. I hope you can give some advice.
I found your site through searching 'can I pay estimated tax with a credit card', so you can imagine I'm sweating this quite a bit right now :)
Thanks very much for your time.
PS - Even a quick answer like "You made $10,000, your estimated tax is $4,000" would be fantastic.
Oh my goodness, Pete. Stop sweating. First of all, nothing horrendous happens if you don't pay estimated taxes on time or ever. You may pay what you owe later on. And, you may owe some penalty and interest. Maybe.
Husband and wife typically file a joint return. Calculations are based on their combined income and expenses. Their total tax is based on their total income and various deductions.
If there is money coming in on which tax was not withheld -- for instance, dividends from investments [OK bad example at this time] let's say rental income from the beach house, well then estimated taxes may be necessary.
Or there may be large amounts of income on which no tax was withheld but perhaps there was over-withholding on wages that made up for it so no estimateds are required.
To determine estimated taxes you need to look at your entire tax situation.
That said, here's an example with real numbers. Plan on paying about 1/3 of your net income toward taxes. Could be more. Could be less. But that's a safe bet.
So if you had $10,000 gross income and only $1000 expenses against it then your net is $9000. So plan on $3000 to the feds and state government.
Or: $10,000 gross, minus $4000 expenses, leaves $6000 net. So only $2000 goes to taxes.
You said you're not a math whiz. If you had six bottles of beer and two friends and you wanted to share, how many bottles would each get? That's 6 divided by 3 = 2. Now add the zeros.
Here are two must read posts: Estimated Taxes and Estimated Tax: How much should I pay?
Do let me know if this doesn't help you with the sweats.