Tuesday, September 12, 2017

Pay Taxes On Time, But Slowly

   This week, in the USA, estimated taxes are due.  That means that if you don't have your taxes withheld by a W2 employer, you need to send the Infernal, er excuse me I mean, Internal Revenue Service a check for about 1/4 of the taxes you will owe on this year's income.  That doesn't apply for most people... but for freelancers, contractors, consultants, and other small business owners, it's a quarterly ritual.

   Many people prefer to get it over with quickly, sending the money directly from the business bank account to the IRS via their electronic payment system, called EFTPS.  Of course, many of us tech addicts like to do that.

   BUT...

   Just like with overpaying taxes (whether estimated or withheld), sending in your taxes sooner than you need to is giving Uncle Sam an interest-free loan, avoidably.  Let's do some math.

   A stamp is currently 46 cents.  Pick an estimated tax payment of $1k per quarter just to make the math easy.  Ass-u-me you can invest at 6%, and that a check takes three days to get there and another week to get cashed, for a total of ten days, while EFTPS is effectively instant.  (It isn't really, but the transaction has to go through by the tax deadline, while mailed taxes only have to be postmarked by then, so the difference is as though EFTPS were instant.)

   By hanging onto the money for an extra ten days, you earn $1k times (1.06^(10/365) - 1) in interest.  That works out to $1.60.  In order to get this, you paid a price of $0.46 for the stamp, plus let's ass-u-me negligible cost for the check and envelope.  So, by sending a paper check, you made a net profit of about $1.14.

   Yes, that's pretty small.  But now, multiply that interest by how many $k your estimated tax payment really is.  In other words, if your payment is $10k, that's about $16 in interest, or $15.54 in profit.  If your payment is $20k, that's about $32 in interest, or $31.54 in profit.  If you like, you can also play around with various parameters, like longer and shorter times of hanging onto the money, higher and lower rates of return, and what the check itself and the envelope actually cost you.  Under almost all scenarios of actually making a decent living off non-W2 work, it's profitable to write out and snail-mail a paper check.

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