I've found out that no good deed goes unpunished. Besides fully funding my Roth IRA (as of September 1), I have done two other significant things this year to improve our finances. One is paying off our second mortgage and the other is making some extra money outside of my regular job. Although they will both benefit us, the tax consequences make the benefits smaller. Because I paid off that second mortgage, we won't be able to deduct as much interest and the self-employment money does not have taxes taken out when I receive the money, but I'll owe close to 50% in taxes on that money when we file our tax return.
I have never been one to really pay close attention to tax law before. Every year since I started working I have received a refund when I filed my tax return. My assumption was that if I ever got to a point where I under paid my taxes on any given year, I'd just have to send them a check for the difference and be done with it. I didn't realize if you owe the IRS more than $1,000 that not only do you owe that money, but you will also have to by penalties and interest because you under withheld or didn't pay estimated taxes throughout the year.
I was doing some more research on paying more taxes on my Adsense and Amazon affiliate income as I earn it so I won't have a huge tax bill at the end of the year. If I'm in debt to anyone I want to get rid of that debt ASAP. Anyway, unfortunately it looks like they don't offer the option of paying the taxes as you go. However, it was suggested you pay quarterly estimated taxes on that money. While doing my research, I found that not only is paying some of that tax by submitting quarterly estimated taxes as I go along a good idea, it might actually be required. Since I don't make a lot of money on those 2 things yet, I think there is a way to avoid filing estimated taxes and the hassle of trying to figure out that paperwork (which I dread almost as much as sending them money... I hate confusing paperwork!). Please correct me if I'm wrong about this, but from what I understand, it's only an issue if your self-employment causes you to owe $1,000 or more when you file your taxes for the year (that's just considering your Federal return). After crunching some numbers and guessing how much I'll make in the last 4 months of 2011, I determined that it is likely we will owe over $1,000 in federal income tax. But, from what I understand, the "loophole" to not have to deal with quarterly estimated taxes is to have extra money withheld from my regular job's wages so that the taxes owed at the end of the year will be less than $1,000. The sad thing is I changed my withholding just a couple weeks ago. Now I have to ask to change my W4 again and have even more taxes withheld. Because I hate being in debt to anyone and don't want to risk getting too close to that $1,000 I think I'm going to have them withhold all the taxes that I think will be due for the whole year. Since I already know we'll owe the state too, I will also set it up to withhold extra for them as well. The really disappointing thing is it is going to decrease my paychecks by almost $100 every week for the rest of 2011! I thought the government was already getting enough of our money! But, on the bright side I at least caught this now and I have 4 months to fix it. It's just going to be a bummer seeing small checks for the rest of the year once I update my W4.