Self-Employed? Don’t Forget to Pay Your State Taxes

by Miranda Marquit

When I first started my freelancing business, I didn’t have a clue about taxes. I didn’t pay quarterly estimated taxes and was hit hard the first time I started making a reasonable amount of money. On top of that, I hadn’t even thought about my state taxes.

The next year, I paid my federal taxes quarterly. However, I was so traumatized by the amount that I owed federally, I once again forgot about state taxes. I went to the accountant sure that I was completely prepared and completely covered, and left shaking my head at my state tax bill.

State Income Tax

State Taxes for Self-Employed

Don’t get caught off-guard with state taxes!

When we talk about paying taxes, we often think about federal income taxes. We rarely think about state taxes. And we usually don’t have to think about these taxes. This is because, for those who work for “the man” these taxes are automatically deducted from paychecks. For the self-employed, though, things aren’t so cut and dry.

Many states don’t require quarterly payments; mine doesn’t. It’s easy to forget about state taxes. However, your state wants its cut, too, so you need to prepare for it.

Paying Taxes to Your State

Paying in a big chunk is usually unpleasant. Since you haven’t been paying all along through paycheck withholdings, you might wind up with a large state tax bill, even if you are covered with your federal taxes.

In order to avoid this problem, it makes sense to plan ahead. It took me three years to finally put a system in place to ease my payment of state taxes, and I’m glad I have that system, since it prevents me from having to freak out about my state tax bill each year.

First of all, there are many states that offer you the option to pay quarterly. I can send in my tax payment whenever I want here in Utah. Quarterly, monthly, whenever. Other states collect more regularly. Find out how it works in your state and adhere to that.

I don’t pay my taxes to the state throughout the year, even though I could. Much like many people don’t like giving the federal government an interest-free loan by arranging for a huge tax refund, I don’t like the idea of giving my state an interest-free loan.

Instead, I set the money aside in a savings account. I do this each month for my quarterly federal tax payments as well. I figure out how much my total tax bill is likely to be, based on last year’s liability, and divide that by 12. Each month, that money is automatically transferred from my checking account into a high-yield savings account.

When my federal taxes are due, I move the appropriate amount money to my business checking account and write a check (I still pay my taxes by check, even though there is an electronic option). The rest of it stays in the high-yield account. When tax time rolls around and it’s time to pay my state taxes, the money is sitting there, waiting. And it has also earned a little extra in interest.

Forgetting about your state taxes, and neglecting to plan for them throughout the year can result in higher stress during tax time. As you plan your business expenses and costs, don’t forget to include state taxes in the reckoning.

Published or updated January 24, 2014.
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