The Future is Uncertain, and So Are Taxes
Back in the bad old days, when I was freelancing in college and didn’t know what the heck I was doing, I got burned badly one year when tax time came around. To the tune of several thousand dollars, which I’d neglected to put away in savings because I was young and naive and didn’t understand the concept of “self-employment tax.” Ouch.
I understand it now, boy howdy, which is why I’ve been trying to see the future and plan for it. Since I started my freelancing business, I’ve been carefully putting away 45% of each freelancing paycheck into a special savings account, and trying desperately not to touch that money.
I haven’t always been successful about keeping that money separate (sometimes a girl’s gotta pay rent), which gave me serious jitters about doing my taxes this year.
For those of us who received W2 forms this year, I know the conventional wisdom is to somehow magically figure out what your deductions should be so that you break even at the end of the year. But I’ve never been able to figure out how to see into the future and wrangle my forms in the right way. And how do you plan your deductions when you have no idea how much you’ll be making? Or if you’ll be changing jobs halfway through the year, or getting a substantial raise or bonus, or taking on some work on the side? I just don’t understand how it’s possible to effectively plan my tax situation a year in advance. Life changes too quickly to make tax decisions like that so far ahead.
Besides, like Nina, I just like getting a windfall!
And guess what? I just bit the bullet and spent a few hours doing my taxes, with an online service I’ve used for several years. Between leaving my job (and the resulting midyear drop in income), business startup costs, wisely tracking my business expenses, counting every single deduction allowable, and going back to school, I’m due for a big, whopping refund.
I did a little dance in my plaid pajamas when the final number came up.
Also, thanks to the IRS’s Refund Status checker, I even know the date by which I’ll get that windfall direct-deposited. Two weeks. That’s a form of predicting the future that I can get excited about.
This means I know how I’m paying for my farm share! And I can pay off the new computer I had to buy in 2007 (and deducted as a business expense)! And some of the refund will go towards paying down debt, and maybe my partner will get a tax refund too! The possibilities!
And maybe we’ll actually go out to eat in a nice restaurant for a change. Because sometimes we all need to treat ourselves, and it’s been a really long time.
Wow! Forty-five percent seems like a lot. I set aside 30% and still end up with enough to pay my tax lawyer and a couple thousand left after paying taxes.
Jan: Thanks for the link to the Refund Status checker. I never knew you could track its status. That’s great!
Congrats on the big refund… glad to hear you’ll be able to support your local farm share and know where your eggs, pork and veggies are coming from!
vh: Only 30%, really? I’m not sure where I got the suggestion to use 40 – 45%, but maybe I should revisit that number. Though I must say, 45% + 5% to my IRA leaves the mental math nice and tidy.