Spring is on the horizon (as soon as the weather clears!). The good is “March Madness,” the start of Baseball, and the landscapes go from gray to green. That’s a lot of good. On the more meager side, is the looming Income Tax Filing Deadline– which this year is April 18th.
For those of us who work as employees, federal and state tax withholding typically causes our taxes to be paid in timely and the filing of the return often yields a welcomed tax refund. Unfortunately – it’s not like this for all of us. Many people are self-employed and if you are in that situation, you are in greater control of the timing by which you pay in your taxes – and under IRS rules you are supposed to pay in quarterly estimates so that your tax liability is at least 90% paid in prior to tax filing deadline.
While this sounds simple enough – in practice, it causes a lot of problems for self-employed individuals. Cash flow – are words we don’t know as children, but as adults – they are words by which we live. If the cash is not there – we manipulate the cash flow so we can pay essential expenses.
In the tax scenario – self-employed individuals often find their personal cash flow needs cause them to delay paying their estimates and sometimes the entire tax bill – leaving them in the quandary of what to do at tax time. Because taxes are “personal” we don’t like to disclose our tax issues to our friends and acquaintances (just ask President Trump). Instead, in this situation, I find many people have a silent conversation with themselves that goes like this –
“Oh gosh, I don’t have the money to pay; maybe if I just ignore filing the return, the IRS will not start billing me and hassling me to pay. As soon as I have the cash, I will file and catch up.”
Guess what – while this happens all the time – it is a TERRIBLE MISTAKE! Failing to file your return (or filing an extension by 4/18 and then filing by the 10/15 deadline) increases your tax liability by 25%! – That is an enormous penalty and totally unnecessary. If you file your return timely and don’t pay the taxes, you are subject to a failure to pay a penalty that is only ½ of a percent per month for up to 50 months.
That amounts to less than 7% annual interest – far less than what you are charged on your credit cards. If you don’t file and can’t pay – you pay both penalties. If you file and can’t pay – you save the big 25% penalty.
As to paying the taxes – IRS allows payment plans up to 72 months to pay the taxes. While it is better not owe the IRS – this is a problem we can easily solve. Sometimes – we are able to pursue strategies such as an Offer in Compromise or even bankruptcy to eliminate the taxes – but the takeaway here is simple – IF YOU DON’T HAVE THE CASH, YOU STILL NEED TO FILE THE RETURN – DON’T BLOW IT AND INCREASE YOUR BILL BY 25%.
GOT IT? Let’s make sure – have another conversation with yourself and say,
“Wow – I’m going to file the return on time and avoid that penalty, and then if I need help paying, I will take advantage of the programs that exist. It’s not the end of the world!”
Now let’s get back to thinking about basketball, baseball and planting flowers. Oh – don’t forget to check out our upcoming FREE seminar on April 12th!
Have a great week,