Image source: Getty Images
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.
Top credit card wipes out interest
If you have credit card debt, transferring it to this top balance transfer card can allow you to pay 0% interest for a whopping 18 months!
That's one reason our experts rate this card as a top pick to help get control of your debt. It'll allow you to pay 0% interest on both balance transfers and new purchases during the promotional period, and you'll pay no annual fee.
Read our full review for free and apply in just two minutes.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
