Most freelancers understand they can offset their business expenses to reduce their tax obligations and that paying a fixed monthly amount to the taxman each month is a great strategy. It removes the stress of needing to pay a huge chunk of money all at once and there’s possibility of a sizeable tax refund by the end of tax season aka financial year. Self employed professionals need to be very good at their jobs, but there’s no need for them to be clued up on the workings of their tax obligation and how refunds are calculated. In saying this a few bad calculations soon has most contractors and self employed workers honing the skill as quickly as they can. There’s only so many times you can cope with disappointment of small refunds or worse still; finding out not paid enough tax has been paid and there’s a shortfall to make up. Here’s three ways to calculate your tax so the control is in your hands:
1. The Old Fashion Method
Using the IRS form 1040. Using this form can be quite time consuming but the form indicates a balance scale formula that’s reasonably accurate. If you calculate and find out that the tax you’ve paid, based on income after deductions and non-refundable credits, is higher than what you were expected to pay, then unless you entered in the wrong data, are refund is guaranteed. Online programs also use a similar method, the only difference is the traditional method has been around a lot longer and is second nature to many workers who have been self employed for some time.
2. Online Calculator or Tool
Using an online calculator can also work out the tax refund and within a short period. You start by entering your specific personal data including: marital status, dependents, and where you reside. Next add taxable wages or income for the year, and the calculator will prompt for standard deductions or itemized deductions. You can choose any, but opting for standard deduction can be a shortcut and then later on, you can determine whether itemizing your deductions is beneficial i.e. you’ll get a larger refund. Next add in tuition credits and any other applicable tax benefits and the calculator will show your estimated refund amount. Online calculators can also be used to calculate your tax return liability so if you haven’t paid your tax yet you can work out the payment needed to bring back to zero. Some of these calculators do a similar job of an accountant with more prompts so you find out the tax benefits you can claim to reduce your overall tax liability.
3. A free SoftWare Program
Tax refunds can also be estimated by use of a free online program which is a more sophisticated calculator. If you are a new user, you start by creating your account by entering the required information. The programs calculates your returns automatically. The main difference between the program and online calculators is a program has more options and features to provide more information about your financial position.
In conclusion, working out your own tax refund or tax obligation is important as it puts the control back in your hands without suffering any unnecessary surprises. It can easily be done by using the aforementioned methods. Good luck with calculating your tax position. Living within your means and saving ten percent of your earnings over and above your tax percentage will provide you with peace of mind that if there’s a shortfall you can settle it without the stress.