A couple of days ago, I mentioned my fleeting feeling of wealth each tax season. That rich feeling comes from adding up the various amounts I collected the previous year from an interesting collection of clients. Invariably, there's a job or two I forgot about.
I know I should do a better job of tracking my income, especially since it's a part of how the hubby and I pay our bills.
Then there are the tax reasons for know how much I make.
I'm not just talking about the big, file your 1040 on April 15 reason.
Added tax work: Accurate and timely tracking of self-employment earnings also is crucial because those amounts factor into estimated tax payments. And the first estimated tax payment for 2009, via either snail mailing of Form 1040-ES or e-filing the voucher, also is due tomorrow.
Yep, April 15 is twice as fun for folks who get income that isn't subject to withholding. Not only do we have to get our Form 1040 data and payments into Uncle Sam, we also have to get the current year's tax ball rolling.
And if your estimated income tally is off the mark, that tax ball will roll into a costly tax ditch.
Estimation methods: So this weekend, as I was working through our 2008 taxes, I took a look at how my earnings have been so far for 2009.
Usually, my rough estimated tax calculations are OK, not good and not horrible. Actually, it's our investment income that trips me up. Like in 2007, when one fund in December paid out much, much more in capital gain distributions than we were expecting. No problem with excessive portfolio earnings this year, but that's a topic for another post.
As for my self-employment income, I don't really worry about trying to hit the estimated earnings bulls-eye. Since my income tends to fluctuate, I long ago gave up trying to guesstimate how much I might eventually have in any given year.
Instead, I use the previous year tax due safe harbor method when making estimated tax payments.
In this case, if you've underpaid your taxes, as long as your 1040-ES payments, along with the withholding you and your spouse might have taken out of other wage income, come to at least as much as your previous year's tax due amount, you won't be penalized.
This method does have one major drawback. If your current year income drops substantially from your prior year's earnings, you are going to be grossly overpaying the IRS.
When I've seen that prospect coming -- say I pay $3,000 in April, $3,000 in June and another three grand in September, but by mid-December I can see that, barring a miracle, my income for the rest of the year is going to be minimal -- I make the adjustment to my estimated amounts.
When I make my final January 1040-ES payment, it's smaller to reflect that drop in income. What I've essentially done is these cases is go to the actual earnings reporting method.
One final estimated tax tip: When figuring your estimated payments, don't forget to include your self-employment tax amounts in your overall calculations.
I remember the first time I made 1040-ES payments. I was so proud that I had done a very good estimate of my income. The total amount that I had sent to the Treasury throughout the year did indeed cover my 1099-MISC income.
But then I completed Schedule SE.
Yikes! I was totally unprepared for that extra amount of due taxes. You can bet that was the last time I didn't also add an extra 15 percent or my estimated income to my 1040-ES payments.
One more form to remember: There's no way to get a postponement of your estimated tax payments, but if you just can't finish up your 1040, you can get six more months to take care of that paper work.
Just file Form 4868 by midnight tomorrow. Again, you can mail in the paper document or ask for more time electronically.
Just be sure to pay any tax amount that is due along with your extension request.