Most people celebrate getting a large tax refund. It’s like you’ve won the lottery. You struggle along during the year and presto, you have this huge windfall of money coming in around March or April that you use to pay off your bills or take a vacation.
On the opposite end, maybe you had a large amount due with your return. You had to scramble to come up with the money to pay the IRS, or apply for an installment agreement to pay the IRS over the course of the year (or even longer).
But what if you didn’t have to wait for your money if you are due a refund, or have to scramble at tax time to come up with money to pay off a large tax bill? There is a way to do this, even if your earnings – like those of so many small business owners – are inconsistent.
So what do you do? The first thing to do, if you have a job, is to go talk to your human resources department, and fill out a new form W-4. You filled this out when you first started at your job, but maybe you didn’t pay that much attention to it. Be sure to pay attention to page two, which will walk you through how many exemptions you need to claim. Most people just put down one or two and are done with the form), depending if they are single or married (plus one for every child they have). Don’t make this mistake.
The best thing to do is take the form home with you, pull out your tax return, and take a look at Publication 505. Chapter one will walk you through how to convert those credits on your return into exemptions to claim. When you finish completing the W-4, the number of exemptions you claim should get you closer to an amount due to you or to the government that is closer to $0 while allowing you to hold on to more of your money during the year.
Next, if you have a business, is to complete a Form 1040-ES to determine your estimated taxes for the year. This form will allow you to determine the amount of taxes to pay every quarter for what you earn in your business, taking into account the earnings and withholding you have from your day job. You will need your 1040 from the prior year as well as the W-4 you just completed for your day job to complete this form. Additionally, you will need to project your business income for the year for inclusion on this form. Be sure it is a realistic income amount, using last year as a guide, otherwise the amount you pay every quarter may lead to a large refund or a large amount due when you send in your return.
Good tax planning should help you to hold on to as much of your money during the year as possible, without having to pay out too much at tax time. Additionally, it can prevent having too much withheld so that you have to wait to get the money owed to you until April. Completing an accurate W-4 and a complete 1040-ES can help make sure you don’t run into this situation. Set up a meeting with your accountant to go over your 1040-ES and W-4 to make sure you hold on to your money as long as possible. If you have a particular question, leave it in the comments, and I will get you an answer. If you don’t want to leave a comment, shoot me an email at firstname.lastname@example.org.
Chris Peden, CPA, CMA, CFM has over 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information. You can reach him at email@example.com, or check out his blog at www.theaccountingscribe.com . In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.