About That Whole “Put 20 Percent of My Income Towards Taxes” Thing
I was very close to what I actually ended up owing—but not close enough.
My accountant called this week and said he had my taxes ready to go. He also said I owed an extra $2,589.
I looked over everything he sent me to make sure there weren’t any mistakes, but the numbers he used matched the numbers I had sent in, so I guess I owe $2,589 on top of the nearly $12,000 in estimated taxes I’d already paid.
Here’s what happened: I’d been saving 20 percent of my pre-tax income for taxes based on the estimated tax recommendations my CPA gave me last April. I even checked myself with Josh Fruhlinger’s Sure-Fire Tax Estimating Process for Freelancers, as well as a handful of other tax calculators I found online, and I seemed to be on the right track.
And I was, actually—or I was within the realm of “good enough.” It turns out that $2,589 plus all the estimated taxes I’d already paid equals 22 percent of my pre-tax income. (Significant digits are significant.)
So, okay, fine. This year I’ll take what I’ve learned and set aside 22 percent of my income for taxes, which shouldn’t be that bad—except for the part where I’m also putting 20 percent towards debt and 15 percent towards savings, and if we estimate my income at $5,000 a month that means I’ll have $2,100 left over for life expenses, and with my rent+bills+health+food running at around $1,800, that leaves $300 per month for every personal and business expense, which isn’t feasible.
So I need to pull savings back to 10 percent, just after taking $2,589 out of savings to pay my extra taxes.
My savings account currently contains $4,805.86, so that minus $2,589 equals $2,216.86—which is a little over one month of expenses, and I want to have three months of expenses in there—and if I put in ~$500 a month going forward, I’ll hit my three-month emergency fund goal in November 2016.
(That’s assuming I won’t need to withdraw any money from my savings account before November 2016, which seems like an inappropriate assumption.)
I was ridiculously close to having that $5,400 emergency fund in my savings account, by the way. Like one month close.
How did all of your taxes turn out? Want to tell me about your refunds? Anyone else end up with a tax bill they weren’t anticipating?
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