Most entrepreneurs aren’t too keen on filing their taxes. Self-employment taxes can be high, and it can also be difficult to keep all of your finances organized throughout the year. The fact that you might have to pay taxes four times a year probably won’t help your enthusiasm either.
Paying taxes is unavoidable though, and you’ll want to make few to no mistakes to make the process much smoother. Here are three quarterly tax filing mistakes you’ll want to avoid.
Not paying quarterly estimates in the first place
Waiting until the April deadline to file your tax returns can be a big mistake if you’re self-employed. The IRS charges a penalty if you don’t pay estimated quarterly taxes, which can be easily avoided.
I was overwhelmed in my first year of freelancing and chose not to pay quarterly quotes. Although I set aside money for taxes every month, I was also slapped with a big tax bill when I filed in February. The tax bill also included the IRS penalty.
As a business owner, you have to be smart with your money. I didn’t want to waste another penny on unnecessary penalties, so I told my accountant to remind me of the deadlines and help me figure out what I had to pay for the estimates each quarter.
Underestimating your quarterly payments
I like working with a tax professional to help me determine my quarterly payments. I know my tax bracket and have an idea of how much I need to set aside each month.
However, there is always the risk of underestimating your quarterly tax payments and still owing money to the IRS in April.
If you underpay your estimated taxes, the IRS imposes an interest penalty. Interest is based on the difference between the amount you should have paid for each quarter and the amount you actually paid while the underpayment remains unpaid. Although the interest rate is quite low, around three percent, it may not be worth the risk of skipping or underpaying your taxes.
That’s why it’s important to properly track your income and expenses using accounting software. You may even want to seek advice from your accountant or a tax professional you trust. It probably won’t cost a ton of extra money either. My accountant includes this service in his annual subscription for me.
Not setting aside additional tax savings after paying your estimates
Let’s say your accountant tells you what you owe this quarter for taxes and it’s less than you expected. While that might be exciting, you might want to pump the breaks before you spend the extra money in your tax account on vacations or other business expenses.
Remember that throughout the year, you only pay estimates. If your income or expenses change or you happen to underpay, you may still have an IRS bill in the spring.
If you don’t have any additional tax savings aside, this will put you in a difficult position and you may even have to pay interest on the amount of the payment.
To avoid this, be sure to keep a cushion of tax savings even after paying quarterly estimates. Once you know everything is paid for and you are on good terms with the IRS, you can then decide what you want to do with the refund or the extra savings.
Do not track payment receipts
The IRS is not perfect and can make mistakes too. Someone I know made accurate quarterly tax payments on time and was still told she was missing payments.
Fortunately, she kept her receipts organized and checked the forms that her accountant failed to detect. There is nothing worse than paying taxes without having those payments credited.
This is a terrible mistake that can easily be avoided by organizing your receipts and reviewing everything carefully.
Paying taxes may never be your favorite part of your freelance job, but it is a necessary task. You work hard for your money and shouldn’t waste a penny on unnecessary fees. Make it easier for yourself and avoid penalties by avoiding these four quarterly payment mistakes.
By Chonce Maddox
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