- As a self-employed writer, I routinely owe the IRS some money every year.
- In my mind, that's better than being owed a refund.
Nice as it would be to get some money back, I prefer my situation.
Years ago, when I made the switch from salaried worker to freelance writer, I found myself in the odd position of owing the IRS money on my taxes for the first time. Previously, I'd been due a tax refund every year.
Now that I've been self-employed for quite some time, I'm used to the idea of not getting a tax refund. And it actually doesn't bother me one bit.
Why a tax refund isn't a good thing
Many people celebrate the fact they have a large tax refund coming their way. But that often boils down to a misunderstanding about what tax refunds are.
It's easy to think of a tax refund as a windfall you've gotten out of luck. But in reality, when you get a tax refund, all the IRS is doing is paying you money you should've collected as you earned it.
Or, to put it another way, when you get a tax refund, it means you gave the government an interest-free loan the previous year for nothing in return. It also potentially means you endured some financial stress by subjecting yourself to smaller paychecks instead of larger ones. That's why I don't bemoan the fact that I commonly send the IRS a sum of money when I file my tax returns rather than get money back.
Now to be clear, I make sure to pay the IRS enough money during the year to not be penalized for an underpayment of taxes. But because I'm self-employed and my income varies, it's extremely difficult to get my estimated tax payments during the year just right.
Still, when I transfer money to the IRS during tax season, doing so means I didn't pay any extra tax the year before. And I'd rather have a scenario where that money sits in my bank account than in the government's hands.
Avoiding stress during tax season
A lot of people will tell you that they'd much rather get a tax refund than owe the IRS money at the end of the year. But to me, owing money isn't stressful because I anticipate it and save for it.
In addition to paying estimated taxes every quarter on my earnings during the year, I also take money and put it into a dedicated savings account so that not if, but when I owe the IRS, I can pay that sum in full. What I'll often do, in fact, is err on the side of overfunding that account.
I might, for example, keep $10,000 in that account just in case, knowing full well that I'll probably only owe the IRS $6,000. The way I see it, I'm not parting with that extra $4,000. I'm simply keeping it untouched in savings so it earns some interest until my tax bill is settled up.
Don't get me wrong -- I can see the appeal of filing a tax return and getting a refund, especially one that's larger than expected. But I don't like the idea of paying the IRS more money than I have to in advance. And so I'm perfectly happy with the system I have in place, even if it means having to part with a lump sum of cash every April.
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