Apr 10, 2008

Estimated Taxes: Sailing in the Safe Harbor

This (2008) is my first year working as a full-time freelancer. Last year my taxes were so complicated due to partial W2-ing and some freelancing that I probably missed a few deductions I was entitled to.

Next year, I'm hiring an accountant in April to do my taxes.

But - I really don't want to spend an extra $300 now for a tax counseling session. I feel like there's enough information online and in books to prep me for everything I need to know. The problem is I'm already, uhm, four months behind (how did it get to be April already???)

The good news is that I've discovered one benefit to being a freelancer and having to pay taxes. No, it's not that pesky little 15.3% self-employment tax that salaried folk don't have to pay.

It's the safe harbor estimated tax "benefit."

As a freelancer, you have to pay estimated tax payments four times a year (there are a few exceptions for people making not that much money, etc, but I'm referring to freelancers that make a living wage).

In 2008, the estimated tax payments are due:

April 15, 2008
June 15, 2008
Sept 15, 2008
Jan 15, 2009

According to numerous articles I've read on the 'net, when it comes to estimating your taxes you have a choice. You either have to pay 100% of last year's tax that you paid (110% if you make over $150k) or 90% of your estimated 2008 earnings.

If you're earning more this year then you were last year, unless you can't control your spending and keep your tax payments safely in a high-interest savings account, there's no reason that you should chose to pay based on your estimated earnings for the upcoming year.

Why's that?

You want to have control of your money for as long as possible. You can either turn it over to Uncle Sam and let him make money off of it throughout the year, or you can keep it in your high-interest savings bank account like ING Direct (don't invest it in stocks, please, you don't need to lose it all before you owe it), gain a little interest as the year progresses, and pay up in the end.

As long as you carefully save for tax season, the huge chunk of money you have to turn over to the government won't come as such a shock.

So that's my plan this year. Last year my total tax (found on line 63 of your federal return) was $4,300, which breaks down to $1075 per quarter.

I know that my 2008 taxes will be much higher than $4,300 (or will they - it depends on how long I keep my contract job. Maybe I'll end up making much less the second half of the year anyway). Either way, the IRS doesn't care as long as you take the "safe harbor" route of estimated tax payments.

Plus, that means I don't have to worry about figuring out my deductions now, for better or worse.

I would like to figure out how to get a home office deduction. Maybe it means I have to move to a place that has a separate room that I can call my office. My rent, which is currently $1050 a month for a studio, is going up in July. I don't know how much, but probably enough to have me out and about looking at other apartment options. I've lived here for two years and really don't want to move - but if the price of this place and another place that's more or less better suited for taxing a home office deduction cost about the same, I probably should move.

But I'll deal with that in a few months...



1 comments:

Stacey said...

Just FYI - you don't need a "room" to qualify for a home office deduction. You need a separate area, dedicated exclusively to your business, but it can be tucked into the corner or side of any room in the house.

If you do move to get an office "room," try to use the biggest room in the house/apartment. All deductions are based off of a square foot percentage. :-) This helps a LOT when it comes time to pay our oil bill.

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