The 2021 tax filing season might still be months away, but that’s not to say you shouldn’t start prepping now. From saving receipts, maximizing your retirement account contributions, and if you’re self-employed or working as an independent contractor—remembering to pay your quarterly taxes- there are lots of things you should be doing much sooner than later.
Quarterly taxes are important
If you’re newly self-employed, or you’ve never worked as an independent contractor before, you’ll want to be sure to plan to pay your quarterly taxes. When you work as an employee and you have federal taxes withheld from your paycheck, you’ll note that your Social Security and Medicare tax rates are calculated as 6.2% and 1.45%, respectively. You’ll also want to note that this is only 50% of what’s owed to the government. The other 50% is paid by your employer.
When you own your own business (or you work as a 1099 employee), you’ll still need to pay Social Security and Medicare taxes—but you’ll need to pay the full amount. (You’ll also need to pay federal income taxes on the money you earn.) If you don’t pay the IRS what’s owed by the April 15 filing deadline, you could be hit with fines and penalties. Suffice to say, if you’re self-employed (or you’re a 1099 employee) and you haven’t yet made payments on your anticipated 2021 tax liability, you’ll want to start doing that sooner than later. Although the most common way to do this is to make equal, quarterly payments, if you haven’t started yet, you still have time. For more information on how to calculate what you’re likely to owe in 2021, be sure to speak with a licensed CPA.
Reducing your tax liability
If you have one or more retirement accounts, you can reduce your 2021 tax liability by maximizing your contributions, but the contributions will need to be made before the end of the year.
If you have questions about your pre-tax contribution thresholds, or you have other questions about how contributing to pre-tax income can reduce this year’s (and future years’) tax liability, you’ll want to speak with an experienced tax professional.
There are numerous benefits associated with starting your tax planning early. For more information on the types of documents you should start collecting now, or other ways you can get a jump start on your 2021 tax planning, call Hughes, Snell and Co., PA today to get started.