Calculating Annual Income
Whether you’re paid hourly, weekly, or receive a fixed salary for the year, knowing how much you’ve earned and how much tax you owe is the best way to anticipate requirements.
For those who are paid an hourly wage, estimate your weekly earnings by multiplying the amount you are paid an hour by the number of hours you are working each week.
Next, multiply the total amount by 52, which will give you your gross annual income, and then divide it by 12. This will give you your monthly average income, which is helpful for calculating quarterly income by multiplying that number by three.
If the number of hours you work each week varies, do your best to estimate the average number of the hours worked on a weekly basis. If you receive any commissions or bonuses, you will need to include these using your best estimate, as well.
If you receive non-hourly income, we recommend taking an average weekly amount (average of at least 6 weeks) and multiplying that number by 4.5 to calculate average monthly earnings. To annualize that number, simply multiply your average monthly earnings by 12.
TRACKING YOUR TAX DEDUCTIBLE EXPENSES
Once you calculate your income, the next step is to calculate your tax deductible expenses by the month and by the year.
The IRS code states that business tax deductions should be ordinary and necessary. Ordinary means that other similar businesses are also deducting those expenses. Necessary means that the expense helps you in your business. You just need to make sure to record these four critical things:
- Amount; and
- Business Purpose.
One of the most basic ways to track your expenses is by doing it through a monthly spreadsheet in Excel or Google Sheets. This includes small, minor purchases such as a cup of coffee, a water, and things like batteries or other minor supplies. No expense, no matter how small, should be excluded from your tracker. Below we show an example of how to track your expenses. To see a longer list of deductions for sharing economy 1099 workers, check our previous posts.
If you have credit cards you should also be making a separate spreadsheet for said purchases. In the end, you should have one for the purchases you make with cash or your debit card and one for the purchases you make with your credit card. This can even be a separate tab within the same spreadsheet, but be sure to track separately then add up in a summary of expenses tab.
So far we have talked about direct expenses. You should also be including indirect expenses. These include portions of your rent and utilities if you have a home-based business and potentially, your vehicle and other larger items. While there is no single formula for calculating indirect expenses — each individual’s fact and circumstances will differ — we can generally say that a percentage based on some kind of “allocation factor” (e.g., square feet, hours worked, or other metric) will be applied to the larger total of expenses (e.g., rent, utilities, automobile expenses). Be sure to track these totals accurately as well as miles driven for business, days your sharing economy asset is rented (home or car), or the square feet in your home 100% dedicated to business. Talk to a tax professional about what a defendable approach would be for these items.
Your spreadsheets should be tailored to track your expenses on a monthly basis and made to help you reflect your monthly, quarterly, and/or annual, income. Generally, we advise putting away 30 percent of net income (after deductions). You can also use your calculator to understand whether you’re overspending or can afford to invest more in yourself through coaching, tools for your business such as software, extra help through virtual assistants, or in physical assets such as computers or office furniture.
Paying your estimated quarterly taxes
Penalties for Late and Unpaid Payments
You must be extremely careful with paying your owed balance or you will face late penalties or penalties for underpayment penalties.
Penalties for failure to pay proper estimated tax are assessed when you have not paid enough taxes throughout the year via quarterly estimated tax payments as calculated on your tax return. These penalties are assessed when you file your annual tax return if you fall under 90% of your tax liability.