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What’s Up After Tax Extension To File?

By Cathy Moran

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.

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Filed Under: Consumer Rights, Small business, Taxes

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Bankruptcy Basics

About The Soapbox

You’ve arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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