The tax extension in the mail and you don’t have to think about income taxes til October 15th approaches. Right?
Not in my book, if you are self employed.
The self employed don’t have their estimated income taxes withheld from their paychecks. There aren’t any paychecks if you are among that resolute band of entrepreneurs, small business folk, and independent professionals.
You are expected to make quarterly tax deposits throughout the year toward the current year’s taxes.
But as I asked bankruptcy clients over the past couple of months about the status of their tax return, I saw a pattern in those who expected to ask for an extension of time to file the return.
Almost always, they were putting off making tax deposits for this year until their tax professional calculated the right amount. They were not only extending the time to file last year’s return, they were postponing advance payment for this year’s taxes.
Courting tax trouble
The light at the end of the tunnel is the approaching express train.
Put off beginning to provide for this year’s taxes, waiting for a precise calculation, and you set yourself up for a tax casualty. You may be short come next spring’s tax season.
In a perfect world, you don’t want to pay more taxes into Uncle Sam’s holding than necessary. But in my experience, the longer you delay beginning to pay, the more likely you can’t pay when you reach year’s end.
I’ve even advocated ditching quarterly tax deposits in favor of monthly tax deposits.
No harm, no foul
Here’s my proposition for those on extension: deposit at least one quarter of the total tax from the last filed return in April, and each quarter thereafter until your accountant calculates more precisely what is required for this year.
If that turns out to be more than a quarter of your estimated liability for the current year, you can even it out in the later quarters by reducing your deposits.
If you find you’ll owe more taxes this year than you did two year’s ago, you’ve at least gotten a start toward paying. You’ll have to make larger deposits in later quarters to avoid penalties for being under withheld.
But that beats confronting a larger-than-expected tax debt without having made any provisions for payment.
Being self employed is a heady proposition, as long as the heady feeling isn’t oxygen deprivation when you learn you owe a fistful of taxes, for which you’ve made no provision.
Image courtesy of complexify.