How to Navigate Taxes When Your Monthly Income Varies
By Jeff Gilbert
Most people typically think about taxes once in a calendar year. When taxes are automatically estimated and deducted from their paycheck, all they do is file their tax return in April. However, if you are self-employed or in a profession with a fluctuating income, managing your taxes is a bit more complex.
To help increase your irregular income, proactive tax management is essential to incorporate into your financial plan. Here are five steps you can take to manage and reduce your tax liability while dealing with a variable monthly income.
1. Understand When Estimated Tax Payments Are Due
Self-employed individuals and entrepreneurs 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:
| Taxes are due on… | …for money earned… |
| April 15 | January 1 – March 31 |
| June 15 | April 1 – May 31 |
| September 15 | June 1 – August 31 |
| January 15 of the following year | September 1 – December 31 |
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 the following:
- 90% of your current year tax liability or
- 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. Create a Tax Plan
After you determine how much tax you should pay, the next step is to create a tax plan to ensure you save the appropriate amount. The general rule of thumb is for self-employed individuals to set aside 25-30% of their income for taxes, 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 may help you reduce your tax liability, ultimately reducing your estimated tax payments and putting less strain on your uneven cash flow.
There are dozens of expenses you can deduct as an entrepreneur or real estate broker. 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. Collaborate With a Trusted Advisor
Managing your tax payments can be complex with a variable monthly income, but with the right people on your team, it doesn’t have to be so hard. At Balboa Wealth Partners, we aim to assist high-net-worth individuals and families in handling the fluctuating income that comes with their professions.
If you’re feeling overwhelmed or confused by important tax planning issues, we encourage you to seek the comfort and clarity a financial professional can provide. To get in touch, you can reach us at 949-445-1465 or email me at [email protected].
About Jeff
Jeff Gilbert is the founder and CEO of Balboa Wealth Partners, a holistic financial management firm dedicated to providing clients guidance today for tomorrow’s success. With over three decades of industry experience, he has worked as both an advisor and executive-level manager, partnering with and serving a diverse range of clients. Specializing in serving high- and ultra-high-net-worth families, Jeff aims to help clients achieve their short-term and long-term goals, worry less about their finances, and focus more on their life’s passions. Based in Orange County, Jeff works with clients throughout the entire country. To learn more, connect with Jeff on LinkedIn or email [email protected].
Advisory services provided by Balboa Wealth Partners, Inc., an Investment Advisor registered with the SEC. Advisory services are only offered to clients or prospective clients where Balboa Wealth Partners and its Investment Advisor Representatives are properly licensed or exempt from registration.
