Turns out even the wisest finance pros aren’t exempt from the occasional “whoops” or two. Just take it from Bible Money Matter’s blogger Peter Anderson.
Anderson, who freelances throughout the year and earns income from the blog, was extra careful to withhold 100% of his tax liability in 2011.
But by the time he’d finished filing taxes this year, it was clear he’d made a mistake somewhere – he owed $5,000 in state and federal taxes. (See tax tips for the self-employed.)
Ever the expert, he made quick work of isolating the problem and realised he made a couple of key missteps:
1) He hadn’t accounted for his income to increase as much as it did, thanks to an extra $15,000-plus in profits from his blog.
2) 2011 was the first year since his wife stopped working outside the home, so he figured the bump in his income would offset the loss of hers, leaving their tax withholding around the same.
He was saved in part, however, by the fact that he was savvy enough to withhold 100% of his federal and state taxes last year. Doing so qualified him for the IRS’ safe harbor requirement, which exempts taxpayers from penalties for falling short on payments.
“Because we planned ahead, I’ll be able to just transfer the funds from our Ally Bank emergency fund and pay the $5,000 tax bill with no real pain to us,” he says. “Of course I’ll then re-fund that account over the next few months, just in case we have another crisis come up.” (See 7 steps for couples preparing for the worst.)
To save yourself from making the same mistake – especially if you’re a freelancer or often do contract work – reevaluate your estimated tax withholding throughout the year to be sure you’re paying enough. Anderson recommends Turbo Tax but the IRS has a free tool as well.