I Owe, I Owe, It’s Off…Oh Forget It, I Owe The IRS Money. Again.
So, my taxes are being filed this week – and I owe money again. Granted, I would rather owe money than get a refund, for sure, as that would mean I gave the government use of my money interest-free all year long! Being self-employed certainly has its benefits in terms of working when I want and for how long I want, taking time off whenever I choose, and spending afternoons outside in the yard instead of stuck in a cubicle. But in exchange for such freedom comes the responsibility of paying taxes myself all year, as I don’t have an employer taking it out every week automatically. I also have to pay a 15% self-employment tax to cover what an “employee” would typically be paying into Social Security. On a regular old paycheck, the employer pays 7.5% and the employee pays 7.5%, but when you are self-employed you have to pay the entire thing yourself (although you can then deduct 50% of that in your taxes somewhere – I leave that to my brother the accountant).
So, where was I…oh yea, I owe money again this year. 2008 was a difficult year for us, as we moved – which started saving us money right away – and I was also trying to pay off over $10,000 in medical bills leftover from my cancer ordeal. When estimated taxes were due every quarter, which I have to pay because I don’t have taxes taken out all year, I had to make a decision – pay less in estimated tax but more on my medical bills, or pay more on my taxes and less on the medical bills. It was a tough choice, but after some careful thought and discussion, we decided to pay less taxes and try to get the medical bills knocked out. The penalty for underpayment of taxes is pretty small, but if you don’t pay your medical bills they send you to collections! In fact, one bill that I never received was sent to collections only 38 days after its due date. So in the end we decided to do our best to bust arse paying off the medical bills and to underpay our taxes for the year, at least until the fourth quarter of the year when I tried to make up for some of it by sending in a huge amount of money to the IRS. But alas, we still owe money come April 15th.
All things considered, the fact that we only owe $2,100 or so in Federal taxes is pretty good after the year that we had. We got our bills all paid off and managed to only owe a few thousand in taxes, which I will take. It could have been much, much worse! So come April 15th, I will pull money out of my taxes fund at ING Direct and pay both the money due for 2008 AND the estimated tax due for the first quarter of the year. For this year, I am aiming to come close to even on my taxes so I don’t owe much of anything (I am shooting for $500 max owed and/or refunded come April 2009), and I want to avoid the penalties for underpayment as well. I will be keeping a close eye on my earnings each quarter and making sure I pay enough to cover any and all taxes. And hopefully, knock on wood, I won’t have any more major medical issues come up which stopped us from paying them last year. However, getting that debt off our books and paid off was such a relief I would probably do the same thing again!
What about you? Have you ever had to make a decision like this? And if so, what did you do? As for your taxes, do you owe or are you getting a refund this year?
How do you estimate your taxes? Is your estimation based on your earnings or on the last year?
Thanks,
Nate
It’s a best guess, at least for me. The IRS wants you to base it on last year, but since I make more each year than the previous year, I have to estimate more.
I might owe, and I might not. Being self-employed presents interesting circumstances when you’re also claimed as a dependent! (Thankfully, this is the last year I’ll be claimed as a dependent on my parents’ taxes… hurray for graduating from college!)
So if my mom claims me on her taxes, I’ll owe $500 (under the threshold for a penalty, thankfully). If she doesn’t claim me and I claim myself, I’ll get a refund of $250. That’s a big difference, to me, anyway! So we’re going to see what a difference it will make on her taxes (tonight) and then decide what to do. If she’ll get more money back for claiming me than I will for claiming myself, she will probably claim me and then pay my taxes for me with the extra refund money.
But what all that means is even though I’ve been “done” with my taxes for a month and a half, I’ve had to wait for my mom to do hers! 😉
Great post! I Was Broke. Now I’m Not. is taking off in a way that is making it a challenge to manage taxes for us too. So reading about your experience is helpful.
Looks like we’re gonna owe about $2k as well. I’ve only sketched it out, so I’ll have to sit down w/Turbo Tax this weekend and see what really happens w/the numbers. We just had work that didn’t pull enough money out, and didn’t monitor it closely enough until later in the year.
I’ve been in a similar position for the past 2 years and ended up not being able to send in much $ on my estimated payments. I am still paying installments/penalties on 2007, but was able to send in more in 2008 for estimated, so I am hopeful that I will not owe too much when I do my taxes this month. I have recently been hired as a full time employee so won’t have that problem in 2009. Hope to get all taxes squared away in the next six months!
I have this problem this year. Last year, I knew my husband’s taxes would take care of it.
But this year he’s unemployed and I’m earning throughout the whole year — not a lot but still… We don’t know if/when he’ll be working again. His unemployment benefits will be running out soon. So we have literally no idea what our income will be.
The biggest thing that i like to remember: So long as you pay at least as much in taxes during 2009 as you paid in 2008, you won’t receive penalties. The IRS more or less figures you made payments in good faith. So you might still owe money, but you won’t accrue interest.
Since money’s tight this year, we may have to shoot for this goal, rather than paying 15.3% of earnings for Social Security/Medicare plus 10-15% for actual income tax each and every quarter.
This year I might owe $240 to the federal and $120 from the state. That’s AWESOME! I won!
But my worse year we owed around $6k to the federal government. I was sick.
Nice going LAL!
MTD,
Maybe I am missing something (or maybe I am pointing out something not thought about)?
Why not file for an extension on your taxes…this way you pay the medical bills and then you save until octoberish when you Know your bill anyway?
We don’t need the extension, we have the money to pay the taxes due. But I did not pay enough estimated through 2008 because we were paying off the medical bills instead, which are now also paid off.
Ah that makes much more sense….the wife did the exact same thing except not for medical bills.
Sorry for the confusion – I thought you meant you had your taxes done today and needed to pay but didn’t have it.
No worries, I can see where the confusion would have come from!
I haven’t done my taxes yet this year, and I’m scared. I Think I will owe about $8k-$10k. I have the cash set aside, but it’s ugly to think about!
I also need to do my estimated taxes, which I’ve never done before (and part of the reason why I will owe so much this year). Ah, I hate taxes. I don’t mind paying my share, just hate how complicated they are.