For someone like me, who is self-employed and does the family taxes, there’s not much of a break between when we file last year’s tax returns and when we begin tax preparations for the new year. In fact, the two events overlap one another since I typically don’t get everything filed and sent off until mid-February.
This year, there have been some adjustments to my tax planning though. Here are some of the steps that I’ve taken to update our tax planning situation and ensure things remain on track for the rest of the year.
When doing our taxes for last year, I realized that my wife had paid significantly more in taxes than in previous years. Therefore, I asked her to check the withholding amounts on her W-4. The report came back that her number of exemptions was at zero.
Since we had added another child to our ranks during the year and were now a family of four, having her exemption amount set at zero meant that we were giving the government way more money than we should only to have to wait for it to be returned at the end of the year. Therefore, I asked my wife to bump her withholding amount up by increasing her exemption number to two. I will see how this affects this year’s tax levels and then determine whether we should keep this level, increase it or reduce it.
As a self-employed person myself, I don’t have an employer upon whom I can rely to handle my payroll tax deductions. This duty is left up to me. I therefore utilize a self-created equation to factor federal and state income taxes as well as employment taxes into my income. This year though, since the payroll tax amount has moved back its previous levels, increasing by 2 percent, I’ve had to adjust my payroll tax calculation along with it. This helps me stay on track with my withholding throughout the year and avoid being too far over or under in this particular area.
In my opinion, it’s never too early to begin sorting, saving, and organizing my various tax deduction records. Especially when it comes to my self-employed business deductions, which can be comprised of a multitude of smaller items, I like to get a jump on accumulating such items at the start of the year. This way I have a running total that I can factor into that self-employment tax withholding calculation I mentioned earlier. Doing this makes my withholding amount even more accurate and means that come filing season, I have a clearer picture of exactly what I owe to the government.
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The author is not a licensed financial or tax professional. The information provided in this article is for informational purposes only and does not constitute legal, financial or tax advice. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.