How to Handle Tax Payments When You Have a Variable Monthly Income

By Sean Condon, CFP®

For most individuals, taxes are a once-a-year consideration since they are estimated and deducted from their paychecks. This leaves them with only the task of filing their taxes in April. However, for self-employed individuals and entrepreneurs with uncapped income, tax management is more complex.

To optimize your less-predictable income, proactive tax planning is crucial to avoid fees and penalties. Read the following 5 tips from our team that you can take as a self-employed individual or small business owner to manage and reduce your tax burden.

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 must calculate and remit payment for what you owe; it is not automatically deducted from your paycheck like it is for W-2 employees.

This is great in that you do not have to pay taxes right away, but it can quickly become an administrative and financial burden if you do not stay on top of it. Failure to pay your estimated taxes or past due payment may result in penalties and fees charged by the IRS, so it is critical to stay on top of these dates.

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:

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:

  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. 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 is important to adjust your savings as your income fluctuates. If you have a particularly successful month, consider putting a large amount away to make up for months where your income is lower. Given the attractive rates available on cash savings, make sure to have a plan for any excess cash you are holding.  Working with a wealth manager or utilizing a bookkeeping system are great ways to stay on top of your tax payments so you do not find yourself facing a penalty come tax season and maximizing your returns in the meantime.

4. Keep Track of Deductions

It is easy to forget about all the expenses you paid for when you are focused on managing your irregular income. But it is important to document as much as you can 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 individual or self-employed business owner. Here are some 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 Trusted Advisor

Tax payment management can often seem like a daunting task, but with the right team of professionals on your side, it does not have to be. At Windgate Wealth Management we’re dedicated to assisting individuals and business ownersin managing the fluctuating income that comes with their professions.

Feeling inundated or uncertain as you navigate tax planning questions? Rather than tackling it solo, we believe you deserve the ease and understanding that a financial specialist can provide.

Contact us by calling (844) 377-4963 or emailing You can also book an appointment online here.

Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts and does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation and your insurance agent for insurance advice.

Data here is obtained from what are considered reliable sources. We consider the data used to be relevant and reliable.

First published May 2023.

Past Performance does not guarantee future results.

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