Managing Your Tax Payments When Your Monthly Income Varies

By Brett Gottlieb

Most people only think about taxes when it’s time to file their annual returns. But as an entrepreneur or real estate broker, you cannot afford to put your taxes on the back burner. Between self-employment taxes, employee taxes, and quarterly estimated taxes, there’s a lot to keep track of, especially if your monthly income varies.

To make the most of your irregular income, proactive tax management is a necessary first step. Here are 5 steps you can take to help you manage and even possibly reduce taxes as an entrepreneur or real estate broker.

1. Understand When Estimated Tax Payments Are Due

As self-employed individuals, entrepreneurs and real estate brokers are responsible for paying taxes directly to the IRS in the form of quarterly estimated payments. Being your own boss means you have to calculate and remit payment for what you owe; it’s not automatically deducted from your paycheck like it is for W-2 employees.

This is great in that you don’t have to pay taxes right away, but it can quickly become an administrative and financial burden if you don’t stay on top of it.

To better manage your tax payments, you must first understand when they are due. This table highlights the typical due dates for quarterly estimated tax payments:¹

Failure to pay your estimated taxes or late payment may result in hefty penalties and fees charged by the IRS, so it’s critical to stay on top of these dates.

2. Understand How Much You Should Pay

Understanding how much you should pay in taxes can be especially difficult if your income fluctuates each year. If you overpay, you run the risk of giving the IRS an interest-free loan, and if you underpay, you run the risk of being penalized. In this case, the safest thing to do is to avoid the underpayment penalty by paying the lesser of:²

1. 90% of your current year tax liability or
2. 100% of your prior year tax liability (if your adjusted gross income for the prior year was more than $150,000, then you must pay 110% of your prior tax liability)

Keep in mind that the IRS also provides a stipulation if you receive uneven income throughout the year. You may be able to reduce or avoid penalties by annualizing your income and making unequal payments throughout the year.³

3. Create a Tax Plan

After you determine how much tax you should pay, the next step is to create a tax plan to help you save the appropriate amount. The general rule of thumb is for self-employed individuals set aside 25-30% of their income for taxes,4 but the exact amount you need to set aside depends on your business structure, tax bracket, state of residency, and more.

For individuals with irregular income, it’s important to adjust your savings as your income fluctuates. If you have a particularly successful month, consider putting 50-60% away to make up for months where your income is lower. Working with a wealth manager or utilizing a bookkeeping system are great ways to stay on top of your tax payments so you don’t find yourself facing a penalty come tax season.

4. Keep Track of Deductions

It’s easy to forget about all the expenses you paid for when you’re focused on managing your irregular income. But it’s important to document as much as you can in order to take advantage of every deduction. This can help you reduce your tax liability, which in turn can help you reduce your estimated tax payments and potentially put less strain on your uneven cash flow.

There are dozens of expenses you can deduct as an entrepreneur or real estate broker.⁵ Here are a few of the most common deductions:

• Startup costs
• Advertising
• Online services and subscriptions
• Travel expenses
• Continuing education
• Software, hardware, and other equipment
• Health insurance premiums and medical care expenses
• Home office and supplies
• Retirement contributions

5. Partner With a Professional

Managing your tax payments can be confusing, but with knowledgeable professionals by your side, it doesn’t have to be. At Comprehensive Advisor, we strive to help entrepreneurs and real estate brokers manage the uneven income that comes with the job.

Are you feeling overwhelmed or confused as you sort through important tax planning issues? Rather than going it alone, we want you to experience the confidence and clarity a financial professional can bring. Email us at info@ComprehensiveAdvisor.com or call (760) 813-2125 to review your options today.

About Our Advisors

Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees in Business Administration and Economics. Brett is Life Insurance licensed in several states. He is passionate about guiding his clients on retirement income planning, helping each client pursue their specific retirement goals and defending the assets his clients have worked so hard to achieve. Brett is a California native and currently resides in San Elijo Hills with his beautiful wife and three children.

With a combined experience of over three decades in the financial services industry, our advisors hail from some of the largest independent broker/dealers and banking institutions in the country. They have dedicated their professional careers to creating personalized financial solutions for individuals and families who seek successful retirement planning and currently offer investment advisory services through AE Wealth Management, LLC. Our advisors take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County and beyond. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.

Comprehensive Advisor, LLC is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Comprehensive Advisor are not affiliated companies. C.A. Financial & Insurance Services, CA Ins. Lic. #6000262. This material is intended to provide general information and is believed to be reliable, but accuracy and completeness cannot be guaranteed. Neither the firm nor its representatives may give tax or legal advice. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income, etc. generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 1267195-4/22.

^[1] https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2

^[2] https://www.hrblock.com/tax-center/irs/tax-responsibilities/avoiding-underpayment-tax-penalty/

^[3] https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

^[4] https://www.thebalance.com/how-much-do-i-budget-for-taxes-as-a-freelancer453676#:~:text=You%20should%20plan%20to%20set,calculate%20your%20estimated%20tax%20paym ents

^[5] https://www.moneyrates.com/investment/alternatives-to-early-401k-withdrawal.htm

^[6] https://www.bankrate.com/taxes/tax-brackets/

^[7] https://www.nerdwallet.com/article/taxes/california-state-tax