“T” is for “taxes.” (Almost) everyone has to pay them in some capacity. As a general rule when creating a personal budget, you should aim to live on about 65% of your earnings and save 10%. Sadly enough, the remaining 25% or so will go toward paying taxes. When you graduate from dental school, some of you will work as employees. As such, you will need to fill out a Form W-4 on your first day of work. This form is used by your employer to decide how much in taxes they should withhold each pay period.
When you first start working, whether you are married or single, whether you have two children or none, you should consider indicating on your Form W-4 that you are “single” and take “0” allowances. By doing this in your first year, you can re-evaluate at the end of the year to decide whether you withheld too much or not enough. It is better to be more conservative in your first year practicing until you have a good understanding of your income, expenses and overall budget.
Conversely, if you work as an independent contractor after graduating, you will receive a Form 1099 each year from anyone whom you worked for. The Forms 1099 will report your income to you each year and you will not have taxes withheld by an employer. However, you still OWE taxes on this income.
Because our tax system is “pay as you go” and the IRS requires tax payments on income as you earn it, independent contractors will likely have to make estimated tax payments throughout the year to avoid penalties on your tax return for under withheld income. Your tax advisor or accountant can guide you through the correct amount to save throughout the year to be able to pay these estimates. Be sure to make these payments timely to avoid late payment penalties.
When it comes time to prepare your tax return each year, as you leave school and enter practice, it is often best to find an accountant to advise you rather than relying on online software. When you are in school and your tax return seems simple, you may be able to easily prepare your tax returns on your own. However, as you start working, thinking about buying a home, starting a family, etc., you will want to find a financial advisor who will get to know you and your specific circumstances well. The IRS has a wealth of tax information on their website to help you understand your basic tax requirements. It is a great place to get acquainted with Uncle Sam.
~Megan Hille, Esq., Pesavento & Pesavento Ltd.
NOTE: Megan Hille writes ASDA’s Money Monday post once a month. If you have a financial question that you would like addressed in a future blog post, leave a comment below or e-mail it to Blog@ASDAnet.org.