Update: Ok, so it turns out that Federal Taxes are pay-as-you go, which means they are due when you earn the income. Most employers do this for you. If you’re self employed, you can pay estimated taxes quarterly. But You can’t not pay until the end of the year. Bummer. This IRS article says a bit more on the subject.
Ok, like most people I have my employer withhold taxes each year, and I usually get a small return. And I was thinking, because Jeremy is having to do his own withholding because he is currently freelancing, how much money am I loosing by giving my cash to the government early instead of late?
Lets run some numbers. Say you have a decent job and make 50K a year. Now, if you make 50K a year, then you are probably going to owe about 18% of that in state and federal taxes, barring unusual situations where you have a huge amount of deductions.
If you took the money you would normally withhold each month on a 50K salary paying about 18% in taxes, you would owe $9000.00 in taxes. If you took the $750 and put it into a savings account like ING Direct which earns 4.5% interest compounded monthly, you would, after 12 months, have $12,120 saved, which means you would earn $3119 in interest you would get to keep.
3K is a nice bit of change. So, what are your thoughts? It takes discipline to not touch that money throughout the year and end up in a bad situation later, but still, there’s that 3K to look forward to.