“In 2007, I went into business for myself. I was awarded a contract that was very lucrative. I had been broke as a government employee and before that, a law student, for what seemed like, FOREVER. Suddenly, I had more money than I knew what to do with. Oh wait, I knew what to do with it: spend it. As quickly as possible.
First class plane tickets, vacations, new car, clothes (oh my God, the clothes), shoes, bags, dinners…I was having a GREAT time. I remember sitting at lunch with a friend of mine in October of that year and discussing that we were going to be totally screwed when it came tax time. He had the same contract I did and said, “Meh, we will make that next month. We will settle down then for a couple of weeks and it will be taken care of.” Within two weeks of this conversation, the contracts were cut. Our monthly revenue was reduced by 75%. Out of nowhere, with no warning. We all thought it temporary. Not so much.
Fast forward to April of 2008 and I meet (for the first time) with an accountant. As she prepares my taxes, she is asking about people we know in common, just regular chit chat. She congratulates me on my new business. ”Okay, so you owe the feds $27,000.” I choked. Literally choked. WHAT? ”Yep, twenty-seven thousand dollars.” ”Um, how do I go about this?” ”You don’t have it saved?” Most definitely not. And I had no way to come up with it. Panic set in.
I eventually paid off that massive bill, several years later. Notice I said “that massive bill.” I am still dealing with the years that followed because I was so busy trying to cut that huge number down that I again, didn’t save for the current year. Or the next year. Or the next. I currently have four years of back taxes owed and nothing but an ulcer and an ongoing low level feeling of panic to show for it.
The lessons are:
(1) You need to fork over a few hundred bucks (even if you really don’t think you need it or can afford it) to talk to an accountant or a tax planner. They can let you know what your situation is and how to plan for it. Don’t be in denial. Denial doesn’t last that long and you will be up in the middle of the night worrying about it. Just face it. Plan accordingly.
(2) If you are self-employed or are paid by 1099 (where there is no withholding) just plan that 1/3 of that money? Not yours. Put it somewhere it can’t be touched. Don’t let your lifestyle take into account that 1/3, no matter how tempting it is. And oh Lordy do I know how tempting it is.
(3) Commit yourself to your quarterly estimated tax payments.There is a (relatively) small penalty for not making them, but that isn’t the point. If something weird happens (like your contract gets axed), you won’t be able to pay and then you will find yourself sucking your thumb and rocking in the corner as you spend two hours on hold with an agent from the IRS begging for mercy.
I learned the hard way. I owe another forty-thousand dollars currently. I’m working with the IRS to repay and with my accountant to avoid this problem EVER happening again. I cannot tell you the hours of my life I have lost to worry or the number of shoes I could have bought with the penalty and interest I’ve accrued.
Ben Franklin was right. Two things are certain: death and taxes.”