Talking to Your CPA About Estimated Income
There are certain things I do, in my life, that I have come to accept as “Nicole Logic.” These are the sorts of things that seem wildly obvious to me but—for whatever reason—most other people don’t see them the same way that I do. When those things happen, I stop and say to myself: “Oh, wait. That’s Nicole Logic. That’s not Rest Of The World Logic.”
And, as I recently learned, estimating my coming year tax income is one of those Nicole Logic things.
I think I thought that my CPA would somehow look at the stacks of 2013 bank statements I gave him, extrapolate that my income had steadily been growing every month, and project 2014 estimated taxes based on a similar rate of growth.
That is Nicole Logic, after all. But Nicole Logic is based on a bit more information than I gave my CPA. I tally up my income every week; last year I gave The Billfold monthly income summaries. I’m very aware that my monthly income is steadily increasing.
Turns out my 2014 estimated taxes were based on a monthly income that was pretty much constant. This means I will probably owe additional 2014 taxes, and might even owe the Underpayment Penalty (dun dun dunnnnnnn). I’m waiting for the final word from my CPA, and I’ll let you know if I end up paying more than the $2,859 I’ve already paid in 2014 estimated taxes.
To be really clear: this error was my mistake, not my CPA’s. If I recall our 2013 tax meeting correctly, I may have made one reference to “and I’m earning more money now than I used to!” I know that what I absolutely for sure didn’t say was “My income has been steadily increasing, and I bet it’s going to be higher in 2014 than it was in 2013. What information do you need to know to figure out 2014 estimated taxes?”
So that’s what I made sure I said this year. Specifically, I said “Please figure 2015 estimated taxes as if I’m going to earn $60,000 gross, and here’s some data to prove that is a reasonable estimation.”
I’m curious to know how other freelancers, small business owners, and variable income earners handle the “estimated income” discussion. Do you provide extrapolated income data based on the first quarter of the current tax year? Do you consider how your income rose and fell in previous years and estimate accordingly? Do you tell your CPA you’re going to earn $60,000 this year because that’s your income goal and you are the type of person who makes goals specifically so you are motivated to meet them?
Or is that just another example of “Nicole Logic?”