{"id":2307,"date":"2022-05-25T21:39:05","date_gmt":"2022-05-25T21:39:05","guid":{"rendered":"https:\/\/franklegan.com\/?p=2307"},"modified":"2024-02-20T13:49:37","modified_gmt":"2024-02-20T13:49:37","slug":"managing-your-tax-payments-when-your-monthly-income-varies","status":"publish","type":"post","link":"https:\/\/franklegan.com\/managing-your-tax-payments-when-your-monthly-income-varies\/","title":{"rendered":"Managing Your Tax Payments When Your Monthly Income Varies"},"content":{"rendered":"

By Frank Legan<\/span><\/i><\/p>\n

Most people only think about taxes when it\u2019s time to file their annual returns. But for people whose income varies, such as business owners, artists, or entrepreneurs, putting off this important task until April is not always the wisest decision. When your income varies, there are many things to keep track of, which is why setting aside regular time throughout the year to work on your taxes can make a big difference when it\u2019s time to file your return.\u00a0<\/span><\/p>\n

To make the most of your irregular income, proactive tax management is a necessary part of the process. Here are 5 steps you can take to manage and reduce taxes when your monthly income varies.\u00a0<\/span><\/p>\n

1. Understand When Estimated Tax Payments Are Due<\/span><\/h2>\n

If you are self-employed or own your own business, you are responsible for paying taxes directly to the IRS in the form of quarterly estimated payments. Being your own boss means you have to calculate and remit payment for what you owe; it\u2019s not automatically deducted from your paycheck like it is for W-2 employees.\u00a0<\/span><\/p>\n

This is great in that you don\u2019t have to pay taxes right away, but it can quickly become an administrative and financial burden if you don\u2019t stay on top of it.\u00a0<\/span><\/p>\n

To better manage your tax payments, you must first understand when they are due. This table highlights the typical due dates for quarterly estimated tax payments:<\/span> (1)<\/span><\/p>\n

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Failure to pay your estimated taxes or late payment may result in hefty penalties and fees charged by the IRS, so it\u2019s critical to stay on top of these dates.<\/span><\/p>\n

2. Understand How Much You Should Pay<\/span><\/h2>\n

Understanding how much you should pay in taxes can be especially difficult if your income fluctuates each year. If you overpay, you run the risk of giving the IRS an interest-free loan, and if you underpay, you run the risk of being penalized. In this case, the safest thing to do is to avoid the underpayment penalty by paying the lesser of: (2)<\/span><\/p>\n

    \n
  1. 90% of your current year tax liability or<\/span><\/li>\n
  2. 100% of your prior year tax liability (if your adjusted gross income for the prior year was more than $150,000, then you must pay 110% of your prior tax liability)<\/span><\/li>\n<\/ol>\n

    Keep in mind that the IRS also provides a stipulation if you receive uneven income throughout the year. You may be able to reduce or avoid penalties by annualizing your income and making unequal payments throughout the year. (3)<\/span><\/p>\n

    3. Create a Tax Plan<\/span><\/h2>\n

    After you determine how much tax you should pay, the next step is to create a tax plan to ensure you save the appropriate amount. The general rule of thumb for self-employed individuals is to set aside 25-30% of their income for taxes,<\/span> (4) but the exact amount you need to set aside depends on your business structure, tax bracket, state of residency, and more.\u00a0<\/span><\/p>\n

    For individuals with irregular income, it\u2019s important to adjust your savings as your income fluctuates. If you have a particularly successful month, consider putting 50-60% away to make up for months where your income is lower. Working with a wealth manager or utilizing a bookkeeping system are great ways to stay on top of your tax payments so you don\u2019t find yourself facing a penalty come tax season.<\/span><\/p>\n

    4. Keep Track of Deductions<\/span><\/h2>\n

    It\u2019s easy to forget about all the expenses you paid for when you\u2019re focused on managing your irregular income. But it\u2019s important to document as much as you can in order to take advantage of every deduction. This may help reduce your tax liability, ultimately reducing your estimated tax payments and putting less strain on your uneven cash flow.<\/span><\/p>\n

    There are dozens of expenses you can deduct as a self-employed professional or business owner. (5)<\/span> Here are a few of the most common deductions:<\/span><\/p>\n