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Death and Taxes- mostly the latter.

August 13th, 2009 at 06:16 am

Making partner 2 years ago was very flattering. As a practical matter -it's been a financial headache. I don't make significantly more now than I did as an employee, and as a law firm partner in the U.S., I am considered self-employed. No income tax is taken from my paycheck. I am expected to make estimated quarterly payments to the government. Our firm estimates the amount of money we are likely to take in for the year and guesstimates a weekly paycheck amount. Adjustments are made as the year progresses. Quarterly disbursements to the partners are supposed to make up your quarterly tax payment. I understand that the system generally works great.

Last year, I went for three weeks without pay. (Work was slow and our clients, perhaps because of the economy, stopped paying their bills. There was a lot of hand-wringing at our house.) The quarterly disbursements were not enough to cover the tax liability. I put the money into a savings account and did the best I could with the quarterly tax payments. In a last minute save, the firm was paid by a client, my share of which went to cover our tax liability. Our long-awaited family vacation was cancelled.

To cover ourselves this year, I've been withdrawing an amount from every paycheck to cover my estimated income tax and putting it into our E*Trade savings account. Any disbursements I receive also go into the account. My plan is to have covered all the taxes, plus some, by the end of the year. The money will continue to accrue intrerest until April, when I'll send a check to the government. Whatever is left will either stay in the account as seed money for next year, or we can pull it and use it to pay of debts.

I have no idea if this is a good way to handle our tax issues or not. We're still not meeting the quarterly payment minimum, but last year the interest on the account covered the penalty +, so I'm not too concerned.

If you're self-employed (or even if you aren't), how do you manage paying the tax man (or for other large yearly expenses)? Any hints, tricks or tips?

8 Responses to “Death and Taxes- mostly the latter.”

  1. Joan.of.the.Arch Says:

    Set aside 25% from each check. State and local income taxes were not paid quarterly, so needed some in April for those, too.

  2. Joan.of.the.Arch Says:

    Uh sorry, that was not a suggestion. It is just what I did. Set asides will depend on your own tax situation, of course.

  3. thriftorama Says:

    Self employment is a headache. We would save as much as possible in a reserve account, we set up a SEP-IRA ( a MUST), and when it was time to do taxes, we calculated how much we earned, how much we could put in out SEP-IRA-- which significantly reduced our tax liability and boosted retirement savings, then paid whatever was left that we owed.

  4. Broken Arrow Says:

    Very interesting! Didn't know a law firm partner is considered self-employed. That's an interesting avatar as well, by the way. Where did you create it? Looks like a Xbox Live avatar.

  5. MomEsq Says:

    Thanks for the advice! I assume that someone's always come up with a better way to do things than me. (Esp. since in this case, I know next to nothing.)

    Broken Arrow: It is an Xbox avatar-I'm a lawyer and a geek! Smile

  6. Broken Arrow Says:

    And your husband is a very lucky man. Wink

  7. NJDebbie Says:

    I know that it must hurt to have to cancel the long awaited vacation and most people would've kept their plans and put it on the credit card. I'm proud that you decided not to add any more debt and over extend- yourself. Can't give you any advice on your tax situation. Sorry!

  8. lizajane Says:

    I used to set aside a flat amount from each check toward taxes, so that there was enough for the quarterly payment plus cushion to roll over to the next quarter if needed. Income was sufficient enough that I refused to touch the accumulation so that IF the quarterly tax payments weren't enough, there would be leftover to pay Uncle Sam. If it wasn't needed, it was usually a nice enough chunk to put against debt.

    I like thriftorama's SEP-IRA setup, and wish I'd known it was an option sooner. (I'm no longer self-employed, so it's all water under the bridge.)

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