Unfortunately, taxes are not based on what is left in your checking account at the end of the year. Every year I have someone tell me they couldn’t possibly owe taxes because they really didn’t make “hardly anything.” The problem is our perception of “hardly anything.” If you are an employee, you should have had money taken out of your check automatically to cover your taxes. This works great most of the time, but you need to check your pay-stubs and make sure the amount withheld makes sense compared to the amount of money you make. That means if your normal tax bracket is 15% but you have less than 10% of your gross income being withheld from your taxes, you could end up owing at the end of the year! If you don’t know what tax bracket you are in you should ask your tax preparer. If we did your taxes for you this information is on the copy of your tax return from last year or you can call us and we can look it up for you. From there it is simple math take your gross pay from your last paycheck and multiply by your tax bracket – this is not going to be exact, but if your withholding is less than 10% of your gross pay you need to talk to your payroll department. Just tweaking the number of exemptions can dramatically affect the amount withheld.
If you are self-employed or have income from a Partnership or S-Corp. this is a different story, often you must pay in estimated tax payments throughout the year or face penalties. The amount paid can change each year depending on the tax strategies used and the profitability of your business. Profit or loss is not the same as taxable income – this often gets people in trouble at the end of the year because there is so much more to calculate than a “simple” percentage. Deductions can make a big difference in the amount of taxes that you owe each quarter. Common things such as meals and entertainment are only 50% deductable while some business expenses such as health and life insurance may not be deductible at all anymore. Penalties and parking tickets are never deductible even if it was a business related expense.
This gets even more complicated when you have two income earners in your family because the withholding from one W-2 employee can often offset the lack of withholding for the self-employed person’s income. Throw children, houses and even charitable gifts into the equation and you can have a very complicated tax situation very quickly.
This all boils down to making sure you ask your tax preparer to run a projection to make sure you have not overpaid or underpaid your taxes for the year. I recommend you do this in October or November so you can have the entire month of December to make any adjustments, payments or even capital purchases necessary to be ready for your taxes. This also allows your tax preparer to show you new strategies that can save you money on taxes.
At Alpha Omega Accounting, we have made our tax planning and forecasting even more comprehensive to help you understand how to minimize how much tax you will owe. Creating tax strategies are my favorite part of doing taxes. I love finding things that may save you money, please call or e-mail us today to set up your strategy session.