We paid a buttload in property taxes this month, and the only reason that I’m not bawling my eyes out is that we saved it up throughout the year. Savings buckets work if you make sure to treat them like they are not your money anymore once you make a deposit.
Our Savings Buckets
I have set us up quite a few separate savings accounts at CapitalOne360 (formerly ING). In fact, here they all are:
- Emergency Fund – for crappy months that pop up. A small percentage of any monthly extra gets put here until this hits $15,000.
- Taxes / Insurance / HOA – set monthly amounts for property taxes and 30% of our paychecks get put here, no limit.
- Roth IRA / Investments – a super huge chunk until the Roth IRA’s are fully funded, no limit.
- Home Maintenance – large percentage of any monthly extra until this hits $10,000.
- Rent Home Maintenance – large percentage of any monthly extra until this hits $10,000.
- Car Maintenance / New Car – $500 a month gets sent here plus a small percentage of any monthly extra until it reaches $25,000.
- Vacation – 5%-15% of any monthly extra depending on how the other accounts look, $5000 limit. We stole from it for the new house too.
- Hubby’s Fun Money – 2.5% percentage of any monthly extra. If it gets huge, we steal from this for other goals (like when we bought our new house).
- My Fun Money – 2.5% percentage of any monthly extra. If it gets huge, we steal from this for other goals (like when we bought our new house).
Altogether, we squirrel away half or more of our gross income into those accounts every month (obviously, the tax account sees the most, lol).
No Exception Rule
Moving money from our checking account into those savings accounts isn’t the hard part. The hard part is avoiding the impulse to raid accounts at will when we really want something. Heck, sometimes we make the choice to ignore our own advice. For example, we zeroed out the vacation account and the car account when we bought our new home in October 2012.
But we do have one no exception rule.
We don’t touch the taxes account for anything other than income taxes, property taxes, home owner’s insurance on both homes, the Home Owner’s Association fees, and an annual allowance to check for overages. No exceptions.
Once money is put into this account, it can’t be taken out unless there is a surplus in April of each year after our income taxes are paid (and yes, we take into account January-April’s contributions when we check for the surplus). If there is any money that wasn’t used for the previous year that was set aside, we divide it up between our other savings buckets based on where our percentages are set at the time and move on.
Prioritizing Your Savings Buckets
We base our percentages breakdown of where to place excess cash on which goals have the highest priority for us. Once those are achieved, the percentage of the money that we were funneling that way then gets divided up between the remaining savings buckets. For example, here is a screen print of our percentages sheet:
Our Savings Priorities (aka, “Yep, I’m That Anal”)
As you can see, we have prioritized our goals in the left column and along the top. We base the percentages breakdown of savings on these priorities. When one is fulfilled, we move to the next column of the sheet and use that breakdown instead. We’ve only made it to the second column this year (Percentages After Roth IRA Target). We’re hoping to blow this chart away next year, lol.
How do you handle annual expenses like property taxes and home owner’s insurance?
It’s that time again – the next payments for estimated quarterly taxes are due on September 16. A few other people thinking about self-employment have asked me about how hard estimated quarterly taxes are to file, and I figured it was time to let everyone know that it’s really easy! It’s just one little form. The hardest part is parting with the check to give the IRS your money.
Okay, so here is the link to find the form you’ll need to fill out to include with your check.
You’ll see a ton of info and even a worksheet to help you figure out how much to send in. But if you want to keep it super simple, don’t freak out. You can simply divide what you owed overall last year by 4, and then send in that amount every quarter.
If you end up owing more than you did last year, you can send in the remainder in April with no penalties since you paid 100% of what you owed the year before. If you end up owing less than the previous year, you’ll get that refund in April. Either way, it keeps things super simple during this year.
Here is the only part of the form that you really care about:
Here is an example of a 1040ES. Just fill out this tiny bit of info and send it with your check. It’s that easy.
Just Make Sure You Have the Money to Send
Okay, so now you know how simple it is to send the IRS their share every quarter. The trick is remembering to save some cash for them as you go, right?
Make it easy on yourself. We have all of our self-employment money deposited into one savings account and distribute it from there. We simply transfer a little more than 30% of what we make into a different savings account that we use just to save up the taxes we may owe to the IRS.
Normally we end up paying 25%-30% of what we make, so we move a little more than that to side and forget it is there until we write the checks. It’s still painful to send off thousands of dollars 3-4 times a year, but at least it is set aside for us to send. Freaking out about rounding up tax money every 3 months would drive me insane.
And that’s all there is to estimated quarterly taxes. Any questions that I didn’t cover?
I can’t believe we’re thisclose to June already! This year is just flying by! I felt like we just paid April’s taxes yesterday, but nope, there is that estimated quarterly taxes due date of June 17, 2013 staring at me on my white board. Poop.
Our Way of Handling Estimated Quarterly Taxes
There is an official way you can work your numbers and make sure to cover your butt from penalty fees by paying as little each quarter as possible. But that takes time without tax help and we don’t generally mind maybe overpaying a tiny bit compared to possibly underpaying by a ton. So we follow the secondary rule – as long as you pay in at least what you owed for last year’s taxes, then you won’t have any penalties even if you owe double in the upcoming year.
So we are taking what we owed in total in 2012, dividing that by four, and sending in that amount by each due date. For us, that comes to about $8000 each quarter (covering the employer’s part of taxes along with the regular part hurts, lol).
Making Sure We Have It
In order to send off $8000 four times this tax year, we make sure to religiously fund an account just for our taxes. We have a blog income account that receives all of our withdrawals from Paypal and pays us $4000 automatically every two weeks. From that $4000, $1250 is automatically moved over every two weeks to our tax account to cover ourselves there too. That means a minimum of $7500 is being placed in there every 3 months (more if there is a three paycheck month).
The key is that we treat our tax account like it isn’t even our money. We don’t touch it at all unless we are adding to the total, making withdrawals to send to the IRS, or making a one-time withdrawal after April’s taxes when we take out any extra that we ended up not needing to use for the year (our own personal tax refund, lol).
Covering Extra Money Too
If we ever make way more than we ended up paying ourselves AND our blog income account already has the padding amount we want ($20,000 is our goal right now), then we disburse the extra based on our priorities but take taxes into account first. For example, if we ever end a month at $21,000 after our last monthly paycheck, then we would send a third of that extra $1000 to our tax account and divide the rest up between our priorities like Roth IRA investments or the new car fund. That way our tax fund is always healthy enough for us to pay the quarterly amounts without dipping into the emergency fund.
So there you have it, the wonderful world of handling taxes when you are self-employed.
Do you do something similar (for all of the self-employed readers)? Or for my non-self employed, aren’t you glad you don’t have to worry about this?
When I wrote about paying off our rent house, a few people emailed me about the mortgage deduction benefit that we’d be losing. Luckily, that wasn’t ever an issue. Even with two mortgages, our mortgage interest and other deductions simply never added up to more than the standard deduction (which was $11,900 for a married couple filing jointly last year).
Here’s the breakdown for us. The following are the deductions that can taken and what they added up to for us last year (and I rounded up):
- Medical Bills – $1000 in some copays and medicines (which I am not even sure are deductible)
- State and Local Taxes like sales tax – less than $2000
- Charitable Deductions – $500 (I volunteer time)
- Mortgage Interest – less than $2500
- Losses from Theft – $0 thankfully
- Job Expenses like travel - $1000 and that would really be pushing the definition
- Total = $7000
So in our case, the $11,900 standard deduction was definitely more to our benefit and has been since we got married in 2005. We always run the numbers just to make sure, but for us, the standard deduction is simply the way to go.
When Itemizing Works
Yet, itemizing is still obviously a great choice for some people. One of our close friends, J, files as a single individual. Between her medical bills and her mortgage interest, it was just a smart idea for her to itemize since that total was greater than the $5950 standard deduction that she could have taken. I also know several couples living along the coasts where housing is more expensive so their mortgage interest is astounding comparably. The standard deduction would be a bad idea for them.
So I am by no means saying that the standard deduction is for everybody. I just wanted to remind everyone that mortgage interest is not always tax deductible for everyone. It isn’t automatically a benefit of home ownership or debt.
For us, the biggest decision was whether to pay off debt or invest, so at best, we made a 4.5% return on about $22,000 this past month. At worst, we have to accept the opportunity cost of anything else we would have done with that money instead. In the end, I like the guaranteed return and being down to only one main mortgage again. The feeling of security is worth a bunch to me, but I do have a ton of respect with everyone with a better risk tolerance than me.
Do you take the standard deduction or is itemizing better for you?
Okay, so we didn’t make as much in 2012 as we did in 2011 since Mr. BFS leaped into self-employment too. But we paid about the same amount in taxes anyway thanks to having to pay the self-employment taxes on everything, which is the employer’s part of social security taxes and whatnot. YUCK!
We Knew It Was Coming
Yep, we knew we’d be paying a butt-load in taxes. That’s why we send in very healthy payments for our estimated quarterly taxes (and will continue to do so). But it still hurts to see what you just wave goodbye to every year. Specifically, we made about $100,000 in taxable income in 2012 after expenses and deductions. We ended up owing about $33,000, but we paid in about $35,000 over the year. So we’re getting about $2000 back. And the crowd goes wild (yay…feel the sarcasm).
I guess I should be way more excited that we at least don’t have to pay the IRS any additional cash for 2012, but that slight bit of relief is pretty much extinguished for me since we have to send in our estimated quarterly taxes anyway. Poop.
What We’re Doing Now
Oh well, in happier news, we have just wired out more than $22,000 to pay off the rent house mortgage (just waiting for an official confirmation of some sort before writing that happy post, lol). That combined with more than $8000 going out for estimated quarterly taxes just makes me feel broke. I mean, I think anyone would probably feel a $30,000 hit to their savings accounts, right?
That said, our 2012 refund is going directly into savings – do not pass Go, do not collect $200. We borrowed $3000 from our savings account that we planned to invest in our Roth IRA’s, so this $2000 is being used to pay ourselves back. Whatever extra we make in April will be used to build up that account even more since we do need $11,000 by the end of the year. When we hit that goal, we’ll have to look at our priorities and see how we want to proceed…
If we want to pay less in taxes for 2013, we could open a SEP-IRA (Simplified Employee Pension). We can contribute up to 25% of our total salary or 20% of our adjusted annual income, up to a limit of $51,000 in 2013. So we’d be pretty safe from over-contributing if we keep it around $15,000 to $20,000. And those would be pre-tax contributions like a 401k. So we would not be taxed on the money we pay in, but we would be taxed when we make withdrawals in retirement. We can balance those withdrawals in our golden years with the non-taxed ones from our Roth IRA’s and be set.
BUT, saving an additional $20,000 a year for retirement would probably mean putting any further rent home ideas away for a while…stupid choices. Nothing seems super easy when it comes to money after the basics, lol.
We may just use this year to re-pad all of our accounts. We haven’t been adding to our car account for a while even though both of our cars are mid-life at best – mine is a 2005 Chevy Aveo with 55,000 miles on it but it’s always had issues, and hubby’s is a 2007 Toyota Prius with 102,000 miles on it already. Also, our fun money and vacation accounts have been hearing crickets since mid-2012.
Anyway, our taxes are done, our rent house is paid off, and I will do a proper happy dance as soon as I have that deed in hand, lol.
How were your taxes this year? If you received a refund, where are you putting it?
I’ve been emailed several times in the last few weeks with the same question – “How do you keep your finances organized?” It’s definitely not a huge secret – I love Excel. But my husband and I both work from home now, so there is a bit more to staying organized than there used to be. Here’s how we keep everything straight.
Excel for the Business
We have several Excel spreadsheets to help us track absolutely everything related to our online income. If the tax man ever comes knocking, hopefully he will absolutely adore us. We’ve streamlined since I first started, so it is easier than ever.
We have one sheet that tracks the income that is 100% ours like the deals closed for Budgeting in the Fun Stuff and our commissions from clients. We have another that tracks my client and co-owned blogs’ deals and all of the associated data. Then we have a third sheet for all of our online expenses. Between these three sheets, every deal, expiration date, and online cost is accounted for and searchable thanks to the Excel interface.
Since we do track every penny and try to keep all of the data we possibly can, the record keeping alone takes at least an hour a day (two or three during our busiest times) just for the online business.
Excel for the Day to Day
Since our lives are not completely online, I also keep an Excel spreadsheet for our daily living expenses. Our budget has a column for our targets and then an additional column where I enter what we’ve actually spent. I use a combination of our credit card statements and bank statements to track everything there to make sure we stay on track.
That spreadsheet also has automated calculations set up to assign any extra income each month to the appropriate savings and investments. I manually transfer the extra money based on what it shows.
Credit Card Statements
Even though every expense is tracked in our budget, we also save the monthly credit card statements and highlight the different expenses based on what is tax deductible.
When we file each year (Mr. BFS literally does our taxes by hand now and then double-checks himself with software), we use those credit card statements and our business spreadsheets to figure out what we can deduct and what categories those deductions would fall into. I highlight the business expenses in yellow to make them easy to find and total. We save the receipts as well for the sake of records, but this highlighting method on the statements is faster for the actual forms.
Overall, by using our spreadsheets and credit card statements, we can track all of our income, all of our expenses, and make plans for our future too.
***I AM NOT AN EXPERT. THIS IS NOT ADVICE. DO NOT EVEN TAKE IT ANY OF IT AS A SUGGESTION FOR YOUR OWN TAXES OR BUSINESS. THIS IS A PERSONAL EXPERIENCE. IF YOU WANT REAL ANSWERS, SCHEDULE A MEETING WITH A TAX LAWYER OR CPA YOURSELF. DO NOT MAKE ME BAN YOU FOR BEING STUPID. THANK YOU.***
As I have mentioned, Mr. BFS and I really didn’t know how we were going to proceed tax-wise now that we are both working from home. Tons of people have suggested we incorporate and form an LLC but nobody could really tell us where to go from there. So we scheduled a one-on-one meeting with a tax lawyer. Here is what we have figured out for our own situation:
Should We Form an LLC?
Not right now. As it was explained, an LLC offers an extra layer of protection for a business with assets and employees. Personal liability is still personal liability. Since our business is in the services industry, whatever we say or do still falls under personal liability. So the protection of an LLC only makes sense if we want to protect ourselves from an employee’s or outside partner’s personal liability. We don’t have employees or outside partners. Plus, there are extra taxes associated with an LLC after a certain income level is reached in Texas. So an LLC would open us up to even more taxes without having any real benefits for us.
As the nice man explained, if you run someone over with your company car while out for business purposes, you are still personally liable for that accident and hopefully have insurance to help you out since your assets are on the line. If one of your employee’s runs someone over with the company car while on business, they are personally liable AND you could be personally liable and your assets would be up for grabs if you are not incorporated. But if you are incorporated, the employee is personally liable and the business is liable instead of you, so your personal assets would be protected.
As of right now, it is just Mr. BFS and myself, and we are a legal entity of one married couple as seen by the eyes of tax law. Whether a sole proprietorship or an LLC, we are going to be held personally liable for anything bad anyway. Now that we know that, we are looking into our insurance options as it would be very sucky indeed to lose everything over one business mistake. Thankfully, we aren’t in a life or death business though, so most issues that we may have to deal with could be handled in small claims court if necessary.
How Should We Pay Ourselves?
I wanted to know if we needed to legally be declaring that we pay ourselves a salary or do we just draw from our income? The difference boils down to using a W2 versus filing our business profits and expenses on a Schedule C. Since there was no tax advantage to a W2 in our case and we are staying a sole proprietorship, it just makes sense to file everything on a Schedule C after all. So no big change there for us, yay!
How Should We Handle the Paypal 1099-K and other 1099′s?
Paypal is now required to send a 1099-K to anyone that brings in over a certain amount of cash through Paypal…that would be me. That wouldn’t be an issue at all except I also distribute payments out to my ad clients, so I am not actually making what the 1099-K says I am making. Also, some of my clients sent me basic 1099′s for cash that is already taken into account on the 1099-K, so that income was actually double-reported to the IRS. Needless to say, we asked what the heck we should do.
It ends up that it really is no big deal. We should report the 1099-K income, report the 1099 income, show the overlap, state the payment distributions as expenses, list all other expenses, and we will end up showing the net income that needs to be taxed. Apparently, even if the IRS has questions, they will send a “matching letter” before unleashing their fury. We can respond to that letter explaining the whole mess and showing our complete records, and they will take a look, realize we are not trying to falsify anything, and all will be well. The trick is having VERY thorough records, which is not a problem at all for us since that is a huge part of our business anyway.
Should We Mash Together my Blog Income and my Business Income?
Yes. In the IRS’s eyes, it’s fine to report all of my blog income and blog business income on the same Schedule C. Yay, one easy answer.
So, after one 30 minute meeting, it ends up that Mr. BFS and I are already doing what we should be doing as far as taxes go. Woot! This very nice tax lawyer was kind enough not to charge us for his time either. But we did ask him about his rates for doing our taxes for us if we decide not to do them ourselves. With our records being as straight-forward as they are, and the fact that he noticed how “organized” I am (aka, anal as Mr. BFS chimed in), he quoted us $300-$400 a year to handle it all. We are seriously considering taking him up on that offer since that seems more than reasonable considering the 10-20 hours it usually takes us to do them anyway. Yay for the decisions of self employment.
Anything interesting that we forgot to ask?