How The IRS Stole My Honeymoon Small Business
When I first changed jobs and went from working for someone else to being self employed life was great.
I was my own boss, took jobs I wanted, ignored those I didn’t.
I worked when I felt like it (at least that’s what I kept telling myself) Life couldn’t be more sweet right?
Well, let me fill you in on something called estimated tax payments.
What are estimated tax payments you ask? This is a question that most CPA’s and Tax Accountants are asked on a frequent basis. Most small business owners feel that because they pay taxes at the end of the tax season, their tax liability is fulfilled.
What I never realized is that as a small business owner and being self employed, the IRS required me to send in payments to cover any anticipated taxes that I might owe for the tax year.
What does that mean? This means that I would have to pay quarterly taxes equal to what I might owe on income I earned for the year. Their reasoning was that I no longer had taxes withheld from my paychecks on a regular basis therefore; they required payments to be made prepaid quarterly.
You might ask “What does any of this have to do with my honeymoon?” Well, let me explain how failure to pay estimated tax payments could have a huge effect on your personal life.
I learned this the hard way. I never paid my estimated payments. I thought this was no big deal; I would just figure out at the end of the year and take care of it then. I wish it was as easy as I had hoped.
The reality of the situation was that I never paid attention to my income. It sure didn’t seem like I was making a ton of money so I assumed I would owe a couple thousand dollars. Easy enough right?
Not really, I had actually made a significant amount more than I had originally thought. (Remember, all income is received tax free when you are self employed). Based on my net income (income minus deductions), I netted about $75,000.
Again, this doesn’t really seem like a ton of money. However, the IRS has consequences for those who don’t plan ahead and pay quarterly estimates. Based on my income level and my tax bracket I actually ended up owing close to $12,000.
When I found out I owed $12,000 I panicked. I thought oh no! How in the world am I going to come up with $12,000? I had been planning for my fiancé’s and my honeymoon for over a year. Every week I put away as much as I could. We had finally saved the $15,000 needed to take our dream European honeymoon.
The reality of my situation was that not only was my honeymoon no longer an option, I would also be paying penalties and fines the IRS assesses for not making my estimated payments.
My heart was broken And this was how the IRS stole my honeymoon.
I am writing this for other small business owners so that they do not lose honeymoons, golf clubs, or other treasures due to lack of knowledge about estimated tax payments.
Here’s what you need to know: Estimated tax payments are required and they are required to be paid on a quarterly basis on the schedule below:
These estimated payments are made on behalf of the individual and not the business. This is because most businesses are established as flow through entities. (Business income flows from business as a line item on the taxpayer’s personal return). Estimated tax payments should be calculated based on business profits (income – expenses).
What happens if I don’t make the estimated tax payments? Failure to pay any estimated tax payments or even underpaying them will result in fines and percentage penalties for every day the taxes are not paid.
The percentage rate in prior years was typically 6 to 8 percent.
How can I avoid these penalties and fines? One way to avoid penalties is by paying at least 90% of the taxes for the current year or 100% percent of prior year. (Lower of the two). This figure increases to 110% for incomes amounts over $150k a year.
If payment in full are not made by the April 15th tax deadline, additional penalties and interest will be assessed.
IRS has streamlined the payment process for making the estimated tax payments. They allow you to establish an electronic account from which can you schedule and make the payments online.
For more information, visit www.irs.gov for links and frequently asked questions.
You will need the following information to establish an electronic account with the IRS:
Social Security Number
Employer Identification Number
and a mailing address.
Payments can be scheduled up to 120 days in advance. Estimated Quarterly tax payments should be implemented by all small business owners. Failure to take this seriously could cause individuals to have to spend money that could be better utilized in their businesses to pay costly penalties and fines or could even abolish some dreams.
All self employed individuals should put a plan in place to ensure these payments are not only calculated properly, but also paid in a timely manner.
Your tax professional should be able to assist you with computing your required tax payments or you can use Tax Planner Pro.
Albert Einstein once said: “The hardest thing in the world to understand is the income tax.”