Well, tax season is now officially over. But that does not mean it is not too soon to start preparing for your 2017 tax return. Now is an excellent time to analyze what you did and did not do correctly in your 2016 return. Did you owe money at the end of the year? Was it a substantial amount? Or did you get a large refund this year? If you only owed a little or had to pay a small amount chances are you are in good shape for 2017. Otherwise, you may want to consider making some changes.
If you owed a substantial amount of taxes and were not self-employed, you may want to reconsider your W-4 withholdings. On your W-4 you tell your employer how many exemptions you wish to claim for tax purposes and your company’s withholding of your taxes. This number does not have to match what you claim on your official tax return, but if you want to be close on what you owe at the end of the year, you may want to consider being as accurate as possible. The key to paying taxes is rather simple really; you want to owe as little as possible or get a small refund at the time you file. Otherwise, the IRS and government may be getting something for nothing. If you are like so many people and look forward to a large refund, you are giving the government an interest-free loan on your withholdings. It would be better to adjust your W-4 and pay only what is required so that you will have use of that money during the year and not the IRS.
Now if you are self-employed or have a large tax liability at the end of the year the IRS will hit you with a small penalty for underpayment. While the IRS does not complain about the free loan many Americans provide each year they do tend to get rather upset when we do not pay our fair share promptly. If you claimed too many exemptions on your W-4 chances are you will be faced with a tax liability at year’s end. If the liability is over a $1,000 the IRS will add an underpayment penalty to your tax liability. Also, if you are self-employed, they would rather have you pay quarterly estimated payments on your earning and not a lump sum at the end of the year. The way this works is the quarterly payments are based on your prior year’s taxes and simply split up over the four quarters of the year. If you fail to make quarterly payments, you will be assessed an underpayment penalty when you do file. The penalty will depend on how much you owe at the time. And remember, when you are self-employed you not only have the federal income tax to consider but also your share of the Social Security and Medicare tax which is normally split between you and your employer. This makes the tax liability much higher for those who are self-employed when they have to pay their taxes.
As a Certified Public Bookkeeper and Quickbooks Advisor I highly recommend that people who are self-employed manage their books throughout the year by using a bookkeeper or if they can utilize Quickbooks for Self-Employed to manage their income and expenses throughout the year. This version of Quickbooks for Self-Employed will aid in your quarterly tax payments and will even track your mileage for you as you incur it and not something you have to estimate at the end of the year when you have your taxes prepared. There is a small fee for this service, but as you are self-employed, it can be used as a deduction as a cost of doing business. Staying on top of your business and its quarterly payments are essential to the health of your business and will help you avoid a massive tax liability the following year when you file.
Taxes are never fun, but with a little planning, you can minimize their impact on you when it is time to file. Proper planning with your W-4. Too many exemptions and you will most likely have to pay. Too few and you will get that interest free loan you provide the government back. If you are self-employed quarterly tax payments are essential to avoid a large tax liability for not only income taxes but Social Security and Medicare taxes that you will owe.
With proper planning, you can make tax time no more stressful than any other day of the year. But with poor planning, it may mean trouble for the ill prepared. If you have any questions about taxes, feel free to contact me or leave a message on the website.