We Talkin' Bout Taxes!?
Updated: Apr 1, 2021
Yes. We're talking about taxes. I know this is nothing to stay up late for, but it's valuable information to know.
A lot of my clients tell me their tax bill seems to grow and grow every year. I always respond with:
"Well heck yeah, that means you're making a lot of money!"
This is never a popular response, but it's true. The more money you make, the more taxes you pay. That's the America we know and love. However, you'd be amazed to know how much money you can save by learning more about the internal revenue code.
"Who has time to read the internal revenue code?"
No one does.
The IRS still wants their money, though. And no matter how hard we try, there's no avoiding them. So be prepared and have a process in place to pay your taxes on time, and correctly. I'm talking bout no more penalties and interest!!
One of my favorite clients once said "well dang AZ, I figured out how to make a dollar, and now I need to figure out how much of that dollar I have to give the IRS?" It was hysterical. It's true - so many people know how to generate a lot of money, and fast, but don't have systems in place to manage it and stay in compliance with all federal and state tax laws.
Taxes are complicating. How much money should I withhold from my paycheck? Do I need to make estimated tax payments? How much should I pay? How do I pay? These are all questions I get on a daily basis, so I hope the information that follows will benefit you and your business.
How much money should I withhold from my paycheck?
You'd think salaried employees have it easy, because, for the most part, all of their federal and state income tax is being withheld for them. Social Security and Medicare are also being paid on their behalf.
So why do you never get a tax refund in April?
You may not be withholding the proper amount. Now, you probably don't remember filling out a Form W-4 with your company, but, this form outlines the number of allowances you're claiming. Generally, the more allowances you claim, the less tax will be withheld from your paycheck (the bigger your take home pay). The fewer allowances you claim, the more tax your employer will withhold from your paycheck (the smaller your take home pay).
Typically, as a new employee, you will fill out a Form W-4 with the head of human resources. Some employers will ask for you to fill out an updated Form W-4 each year, but if they don't, it's a good idea to update it when your personal or financial situation changes. Examples of these changes include getting married, having kids, getting a raise, or landing a side hustle that's generating significant income.
So, if you normally have tax due every tax season, I advise going to the head of human resources at your company and asking to update your Form W-4. If you originally were claiming 3 allowances, but still getting hit with taxes at year-end, try decreasing it to a 2 or maybe even a 1. You don't want to pay the IRS too much during the year, but you also don't want to pay too little. The key here is to find the right balance of your tax withholdings.
Should I make estimated tax payments? How much should I pay?
It depends (most common answer in the accounting world). Are you a W-2 employee? How many revenue sources do you have? What does your spouse do for a living?
Taxes must be paid as you earn income during the year. If you are a salaried employee, you are already paying your taxes as you go by having your employer withhold federal and state income tax from your paychecks. But, what if you have other sources of revenue? All money you earn must be accounted for in the eyes of the IRS and this means income tax must be paid as this revenue is earned.
There are two guidelines to follow when determining if you must pay estimated tax:
1. You expect to owe more than $1,000 come tax season, and...
2. You expect your withholdings and credits to be less than the smaller of: 90% of the
tax shown on your 2017 tax return, or 100% of the tax shown on your 2016 tax
An easy way to figure how much you owe is to look at line 44 of your 2016 Individual Income Tax Return Form 1040. Divide that number by four, and as long as you're paying that amount quarterly, whether that be from employer tax withholdings or from tax credits you plan on claiming or from personal payments made to the IRS during the year, you will avoid underpayment penalties.
For my entrepreneurs out there, quarterly tax payments are due in the middle of the month in April, June, September, and January (of the subsequent year).
Another way to figure your tax liability is to forecast how much income you'll be reporting. This includes how much income your spouse makes, dividends and interest income, all capital gains, etc. If you own a s corporation, figure out how much of the company's profit that you will be reporting on your personal tax return and figure the tax you will owe based on that amount. Divide that by four and pay it evenly throughout the year in the months mentioned above. This method is a little more tricky and time-consuming, but if done properly, you can make quarterly payments that will satisfy your total tax liability without worrying about underpayment penalties, or having to tap into that retirement account to pay your tax bill come tax season.
As long as you're paying 90% of what you think you're going to owe or 100% of your prior year tax liability, you'll avoid substantial penalties and interest charges.
If you want to talk 'bout taxes, please reach out. I'd love to connect and offer you some value.
Here's to making money, and KEEPING that money!
If you have any further tax-related questions, or are looking for a better understanding of your business, financially, email email@example.com and tell me about your company. I love meeting awesome new people, and if I can’t help you I'll do my best to get you to the people who can!
Side note: for those who don't know the meaning behind the article title, google "practice Allen Iverson."