Tax Time: Why it Pays to Prepare - for Employees & Consultants!

How can I keep more of my paycheck?

Will I owe, or will I receive a refund this year?

Why are my estimated tax payments so high?

Knowing and understanding your federal tax liability now will save time, money, and headaches when filing time rolls around later.

Read on to learn about the benefits of preparing early.

 

Working full-time as an employee:

Typically filing Form 1040 or variant.

  • Receiving a refund means you have over-estimated your tax bill and have essentially given the federal government an interest-free loan of your payroll withholdings.
  • Owing money at tax time means you have under-estimated your tax bill and must pay the amount due in one lump sum at the time you submit your tax return.

In both of these situations a little research and planning can bring positive results at tax filing time. By properly estimating your year-end tax bill now: if you've received a refund in the past, you may now be able to keep more money each payday by adjusting withholdings (form W4, usually found with accounting or HR departments); if you've owed in the past, adjusting withholdings over the remaining year can prevent a lot of pain in a lump sum later.

2017 IRS Withholding Calculator is a great resource for estimating and planning for tax time, and always consult a tax professional before making withholding decisions.

 

Working as an Independent Contractor, Consultant, or other 1099 position:

Typically reporting business income on Schedule C with Form 1040.

As with our previous scenarios as an employee, in these scenarios a little time spent planning now will prevent surprises and headaches later at tax time:

  • Receiving a refund means you have over-estimated your tax bill and have essentially given the federal government an interest-free loan when making the required estimated tax payments throughout the year.
  • Owing money at tax time means you have under-estimated your tax bill when making the required estimated tax payments throughout the year and must pay the amount due in one lump sum at the time you submit your tax return.

When working as an Independent Contractor, Consultant, or other 1099 position, it is up to you to calculate and submit estimated payments to the Treasury throughout the year based on your expenses and income. Therefore, it is absolutely crucial to track expenses, income, and other transactions as closely as possible to allow for an accurate calculation. PNW Financial Concierge can ease the headache by doing the bookkeeping and communicating with your CPA for you; or enabling you to do your own bookkeeping by setting up a system and guiding you through the learning process, step-by-step.

 

In our next edition of the "Tax Time: Why it Pays to Prepare" series, we will discuss benefits of accurate accounting for business owners and their tax concerns.