by Ashley
Husband and I are both self-employed and, therefore, pay our own taxes (as opposed to having taxes withheld from our paycheck). We file “married filing jointly” and I knew that for 2014 we’d be teetering between two tax brackets: between paying 15% and 25%. (Side note: Doesn’t that seem like a huge jump? I don’t want to get political or anything, but the next bracket goes from 25% to 28%, which seems more reasonable. But the 15% to 25% jump hurts! Ouch!). As a result, the amount we paid for estimated quarterly taxes varied (I typically paid about 20ish percent of our income). Well, go figure, that wasn’t enough. And now we’re left with a pretty hefty sized tax bill.
So that’s fun. And something we’ll be dealing with in the coming months. I’ve never had taxes be part of the blog before (I’ve always reported our income “after taxes” – said in quotations, since clearly we weren’t withholding enough for taxes). So, although our tax bill is obviously a new debt, I’m going to keep going how I have been and simply pay that bill off the top of our income rather than putting a new line item (titled taxes) in our monthly debt list.
The big bummer, of course, is that I’ve been crossing my fingers for a pretty profitable next couple of months as income increases a bit. It’s not a guarantee, but last year hubs’ business was booming over the summer. And although I continue to get paid the same as always (same amount per class), the classes I teach over summer are condensed so instead of having my pay spread across four different months I get two lump sums, making two summer months (June and July) look really good for income. (Again – same actual pay per class, but it’s double the sized paycheck as during the Fall or Spring semesters). I still hope to make some big progress with other debts, but this is certainly a bit of a setback as we pay back Uncle Sam to the tune of $3500. Yes. *Groan!!!!* We’ve owed before (we owed a little bit last year), but never to the extent of owing multiple thousands of dollars.
I do have a plan though. I’ve already set aside some money from this month’s income that I’m going to put toward taxes. If I spread this out over three months, the hit won’t be as hard. We have about that amount of time to pay (longer if we pay additional penalties, but I’d like to avoid that and just pay this off ASAP), so about a thousand a month is going to be coming off the top of our income for the next few months. Disperse the pain a bit instead of being hit all at once.
I guess it’s a good thing. New tax bracket means we’ve had a higher income. That’s an awesome thing for us small-business owners! I only hope to continue seeing our income rise across time, so I better get used to seeing a growing level of taxation. ; )
Did you owe the government any money this tax season? If so, how did/do you plan to pay for it?
Did you get a refund? If so, what’d you do with it?
Hi, I’m Ashley! Arizonan on paper, Texan at heart. Lover of running, blogging, and all things cheeeeese. Freshly 40, married mother of two, working in academia. Trying to finally (finally!) pay off that ridiculous 6-digit student loan debt!
Do you do your own taxes? For a hit that big, I might consider hiring a CPA, if you don’t already. I think ours was only about $250, which was less than I expected. They might make up the cost in seeing if they can find additional deductions.
Very true! Hubs does it through some program that ties into his business program stuff. But for the past 2 years we’ve been saying we need to hire someone to do it. I think this year will be “THE” year. He actually has an appointment to meet with a CPA this week so hopefully the meeting goes well (or he may meet with a couple people, who knows?) But, yeah, I think the days of doing it ourselves are over.
you’ve mentioned this before. it seems like your tax bill is pretty unpredictable. I don’t know how it works for self-employed people, but surely there is software or some kind of service (like a CPA) out there that would help you balance your estimated payments throughout the year so you don’t get hit like this with a surprise.
if not, maybe i should create some.
http://quickbooks.intuit.com/self-employed/ Do you use anything like this?
I think so. I’d have to check with hubs to see what actual software he uses. I know he has some business software stuff to track his income/expenses (and much more, too – invoices/payroll/etc. It tracks all kinds of stuff). Mine is much simpler since I get paid a standard amount per class. His income is where things get all crazy. Clearly, though, the accounting hasn’t been going so great. I think we’ll be getting a CPA soon.
I had money saved up in case I owed (first year with freelance income, so wasn’t sure how it would play out) and I actually ended up getting a $450-ish refund so I was able to use my refund and my saved up “in case” tax money for some much-needed home repairs and debt too.
YAY!!! That’s great news!!
The good thing about the jump up to 25% from 15% is that it’s only on the next level of income, not the total. You only pay 25% on the amount above the highest dollar that is taxes at 15%.
Hubby and I had to pay again this year. It was right at $2,800. We’ve made adjustments, but I lost my dependent deduction so it jumped back up a bit. We consistently spend less a month than we make, so the payment wasn’t a huge deal. Well, that much money is a huge deal, but it didn’t put us in a bind. I’ve since made additional adjustments to my paycheck and he’s going to start having taxes withheld from his social security income (which is the culprit).
Ohhh, thanks for clarifying! Ouch, that’s still a pretty hefty sized bill! It hurts when you feel like you’re netting “X” amount of income and you come to find out your net is actually lower since you’ve been underestimating tax obligations. Sigh.
This is a constant struggle for us. Although my husbands salary is all taxed, I am paid partially by grants and not all of the grants have the ability to withhold for taxes. This year we thought we were squared away until my husband got a sizeable bonus at Christmas that pushed us into another tax bracket. We were so busy celebrating his accomplishment that we didn’t realize until after the new year what had happened and had to pay a 15k tax bill. Lesson learned. On the positive side we had the bonus to cover it and some left over and all unexpected money is a gift no matter the sum. Plus, I’m grateful for what our taxes cover in the community and for research 😉
Wow! That would come as quite a shock! I totally agree that I’m grateful for the services our government provides. Not to get political (and I’m very moderate and a swing-voter anyway so this isn’t a democrat/republican thing), but my total idealistic system would be to have X% that was owed in taxes, but we only paid 1/3X to the government for distribution, and the other 2/3 we could put toward whatever programs we wanted (with certain limitations, of course. This is very condensed nut-shell version of my dream land). For instance, I’d love to “adopt” some local roads and funnel my tax money to maintaining them, patching potholes, etc. Or when my girls are in school I’d totally “adopt” the school and have my taxes go toward maintaining operations there. Again – this is utopia land and would never work in real life, but I get so disenchanted with the $100 toilet seats and $50 plungers purchased by different law makers, not to mention their giant salaries (on general) and the difficulty with remaining steadfast committed to the people (as opposed to the lobbyists) so…yeah. It’s not a perfect system (no government is), but I do wish we had more say in exactly where our tax money went. That is all. Stepping down from my soap box.
So frustrating! I think splitting it up over 3 months is a good idea though, makes it hurt less! The first year I worked full time they weren’t taking enough $ out of my paycheck and I ended up owing $4200!! Uggghhh biggest check I’ve ever written in my life and it was not fun. Thankfully I had the cash in the bank but stil. Anyway, hoping for a fantastic summer of income so you can still stay on track to meet your 2015 debt goals!
WOW! That would be SHOCKING considering you were having taxes taken out (and it just wasn’t enough). Glad you had the cash to cover it!
And, yes, I’m really hoping we can stay on track for my 2015 goals (paying 30K this year). We’re a bit behind right now, but hoping to catch up over the summer. We keep chugging away so that’s the most we can hope for!
This might be an unpopular response, but I think I would use the emergency fund or other savings to pay this item off ASAP.
I can reassess and see how things fall.
From last year, I know that we were unable to pay (at all) until our official tax bill came in. Like – they would accept the money, but it actually made things drag out longer to try to sort things out. Then, once the bill comes in (which will probably be mid-May-ish), we have another couple months to actually pay in full (I think 60 days, but I could be wrong…it might even be 90 days?? I know more versed tax people read here, so maybe they could clarify if I’m wrong??)
Sooo, my point is that I’m saving up NOW (from April, then May, and June – potentially into July depending on how long we have), and we’ll make one lump payment which should cover the full debt. This will minimize penalties (as opposed to applying for extensions, etc.) If we pay this way then there wouldn’t be any need to tap the emergency funds because it wouldn’t save us any money over my current plan, anyway. That’s my current thought process. We’ll see what the official “you owe us money” letter says in terms of how long we have to pay.
What you described is unfamiliar to me. I’m used to income taxes due April 15th, you self-report your income, deductions, payments and credits, and at the end of it you know exactly what you owe for 2014. And you pay it on April 15th, or the interest and/or penalties start to accrue. You’re done. The IRS then cross-checks this offline against all the information submitted directly to them by payers, banks, etc. and they contact you if there’s a discrepancy. But that could happen 2 years later.
What you described sounds more like an audit for a prior year (not 2014) with an assessment due. You provide the requested information, they determine if you underpaid or not, and compute the amount you owe. For that, when you get the assessment (ie. the finalization with amount due), you pay it within the prescribed timeframe. But that likely will include interest, penalties etc. too.
I’m quite confused by this as well. I’m sure part of the issue is that your estimated payments went up, which would take effect in July, however, 2014 taxes were due in full on April 15. Even people who file extensions need to pay all liability up front and then have until September 15 to file their return.
That said, I don’t know what the Arizona implications are here, so perhaps that is coming into play with the deadlines as well. At the end of the day, I would dip into cash reserves if needed to take care of tax debt.
If your income is heading upward, which is a good thing, you also need to start being aware of phase-outs that could impact you based on your taxable income:
1. Eligibility for student loan interest deduction.
2. Eligibility for child credits and dependent care credits.
3. Eligibility for Roth IRA deductions.
As self-employed’s, you may want to investigate SEP or SIMPLE IRAs etc that will provide retirement savings (and with less limits than an employee) and in the process reduce your taxable income and thus your tax liability — and thus eligibility for the above.
Probably too late for 2014, but definitely think about this for 2015.
Yes, I know these are definitely things to think about. I haven’t written about it yet (probably won’t dedicate a blog post to it until I have the official notification), but I’m assuming my IBR payments are going to increase this year. Since IBR (income-based-repyament) is inherently based on income, and our income went up, I’m sure our payment will go up, too. I don’t have to reapply until August so I still have a few more months before this will happen. Right now we’re not in danger of being ineligible for Roth, but that’s all subject to change based on what happens with my employment and hubs’ employment. I am aware of SEP IRAs, so that’s a great alternative if we get to the point that we are either (1) maxing out the Roth, or (2) ineligible for Roth. We’ll see what the future holds!
This would be a great time to start research SEP IRA and Solo 401k’s. They can greatly reduce your tax liability. I haven’t researched them too much because they are not available to me, but one may also redistribute your self employed income to help you avoid FICA. Which is almost 16% I believe! You can also classify contributions as “employer match” and put in more than the standard 18000 that others all while avoiding taxes. Maybe something to begin to research now, so that when you are ready you have a plan you can put into action.
I know you really want to get rid of your debt before saving for retirement. But having a lot of income in the 25% bracket can be a waste.
Definitely agree with everything Angie is saying here. Ashley – prompt your accountant about this. It’ll be well worth your time to discuss.
Just another thought, by diverting some of the business profits to an “employer contribution” should reduce the salary you are paying yourself. Depending on your assumptions this may also help you lower payments on your IBR loans.
Actually, if you under-represented your income in 2014, is there some kind of recalculation that will happen on your IBR? Also, how will this affect your payments next year? Lots of moving parts that can work towards your advantage or sneak up and bite you if you ignore them!
Oh man, lots of great things to think about! Thank you so much for pointing this out! Yes, my IBR payment will likely be changing this year (I reapply in August). I’ll write a post about it once I have official new payments.
Just wanted to reiterate Alice’s comment above re: the fundamental misunderstanding of the tax brackets that many people have! This is a very important factor in financial literacy, in my opinion.
If folks are getting hit with 10k in underestimated payments, that really goes beyond moving into a new tax bracket – it’s just a mistake in financial planning (using the 15 to 25 brackets as an example, you’d have to miss 100k in income to get a tax bill that high!). One strategy is to calculate your actual net tax percentage from one year to estimate the following year’s withholding (given similar income). Depending on your financial psychology, you can add a few percentage points to that just to make sure you get a refund back instead of having to scramble to make up a deficit.
Oh god, definitely didn’t miss 100k worth of income! lol. I definitely chalk this up to my own ignorance (and hubs, too….we’re a team ; )) I’ve gotten some awesome suggestions from Angie, though – especially regarding opening a SEP to limit tax liability. My Mom is a real estate broker (owns her own small brokerage), and I know she’s been doing this for year. Hubs was going to meet a CPA himself, but maybe I’ll plan to go with him while the girls are in preschool so we can sit down and talk about all these things. It’s too late for 2014 but could make a HUGE difference for 2015 taxes, for sure!
Yes, go along to meet with the accountant as well. The accountant will have questions specifically for you in regards to your income. Besides that, building a long term relationship with an accountant is key and you’ll want to make sure to choose someone you are both very comfortable with.
In reference to the comment about missing 100k of income, that is not likely the case here. I’m assuming medicare and social security contributions made up part of the assessment, which are very expensive when both the employer and employee portions are remitted. $3200 actually seems like a fairly reasonable amount due to me.
Yes, I agree, I was trying to point out in my example (not just for Ashley’s situation but for some of the other commenters) that getting to the next tax bracket is very unlikely to be the single root cause of a large unexpected tax bill.
I generally agree with other commenters that having a CPA/accountant is a good idea, especially with the more complex situation of being a small business owner, but I would also encourage everyone to go through their return line-by-line as well. I’ve done my taxes since my early 20’s even as they’ve gotten progressively more complicated (I use tax software now instead of doing it by hand) and it is really nice to not have the tax system be a “black box”, makes for much easier planning and decision-making!
I totally agree this tax bill isn’t due solely to the tax bracket change. We definitely underpaid in general (we did pay estimated quarterly taxes, but clearly not enough).
Hi Ashley-
As you have actually entered into an area where I have experience I have so many questions and comments but I will try to keep them brief. As AS mentions above, if this is a tax bill for the 2014 Federal fiscal year then penalties and interest have already begun accruing and I am not sure why you would be waiting on a bill (unless this is for a State tax return and not Federal). That being said:
Does your husband file a tax return for his business separately or does he simply complete a Schedule C as part of your joint return? Between the several employees he takes on over the summer and the large scale jobs he has been able to take on, it might be time for him to consider setting his business separate from your personal tax return……..
When you receive your tax documentation from the Universities for your pay, does it come on a W-2 or do you receive a 1099 misc? (If it is a 1099 misc there are a lot more costs that you can deduct which can help reduce your tax liability.)
Another thing to consider when calculating your quarterly taxes is that you and your husband do not just pay income tax, you also pay self employment taxes. Self employment tax allows you to, in future, draw from Social Security and Medicare.
I also agree with looking into self-employment retirement accounts as they can help you to defer your tax liability; you would most likely be able to deduct your entire contribution to a Traditional IRA from your taxable income (and that could be $11,000 if you max one out for yourself and your husband). This could also help you drop back down to the lower tax bracket.
All of this being said, if your husband has been doing your taxes, even with the small business, for years you might be able to get away from having to incur the costs of a CPA and just see a registered tax return preparer. The IRS keeps a listing that you can search with several different parameters: http://irs.treasury.gov/rpo/rpo.jsf
I am sure you didn’t expect to open such a can of worms when bringing up tax time, but as I have learned from working within the industry, people always have strong opinions and lots of questions!
Cheers,
Meghan
Oh man, I have to admit my ignorance and just answer with a blanketing “I don’t know” statement. I can check with hubs today to try to gather some of these answers (e.g., no idea about how he files for his business, my university tax documents were paper copies – not electronic – and I did a quick cursory look, but don’t know which file/where hubs stored them so I don’t have that info immediately available). Thanks for the link for finding tax preparers. That might be a good option, too!
Man, I feel your pain! Back in February, husband and I were fantasizing about what we’d do if we got a tax return. Then we actually did our taxes and found out we owed over $1500. Neither of us is self-employed, but husband has a bunch of part-time jobs as a music instructor, and a couple of them didn’t withhold any federal taxes. We’d set aside a bit of money for taxes, but obviously not nearly enough. Thankfully, YNAB made it possible to assemble the rest of what we needed before tax day.