I Cannot Afford to Pay My Estimated Quarterly Taxes. What Should I Do?

Posts Tagged ‘self-employed’

I Cannot Afford to Pay My Estimated Quarterly Taxes. What Should I Do?

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Q: I am Going Through a Very Acrimonious Divorce and Paying Through the Nose. I am a Private Practice Epsychologist. I Usually Had No Problem Paying Estimated Taxes, But Can’t Make Ends Meet Anymore. My Ex Refused to Sign the Joint Return Last Year Which Cost me $20K. I’m Afraid That Every Year I’ll Get Further Behind B/C of the Inability to Pay Estimated Quarterly Taxes. I Can’t Even Function With the Money I Have. What Should I Do?

A: I’m sorry to hear about your bitter divorce and the financial problems you’ve been experiencing. I sympatize with you on both fronts – having been through both ordeals myself. Moreover, I also know from firsthand experience – as an entrepreneur too – how difficult it is to pay those dreaded estimated quarterly taxes.

As you may know, as a self-employed individual you are obligated under the law to pay federal income tax, along with Medicare and Social Security taxes, more commonly called self-employment tax. How much you pay in federal taxes is based on your adjusted gross income. The current rate for self-employment tax is 15.3% on the first $106,800 you earn. Of course, you also have to factor in any required state and local taxes, depending on where you live.

The deadlines for filing and paying your quarterly estimated taxes are: April 15, June 15, September 15 and January 15 (or the next business if those days fall on a Saturday, Sunday or legal holiday).

If you can’t pay your quarterly taxes, don’t make the mistake of not filing at all or ignoring your situation. That will just worsen the problem. A failture to file taxes and pay what you on on time could result in late penalties and interest of 25% or more.

So if you simply don’t have the money, try one of these options:

1) Request an extension of time to pay
Extensions are usually granted for 30 to 120 days. You still get socked with penalties and interest, but they’re usually less than what you pay in an installment plan.

2) Ask for an installment agreement
With an installment agreement, you request a payment plan with the IRS for the most recent tax year. You can get a payment plan for as long as 24 months and not have it impact your credit rating, in terms of the IRS putting a lien against you or reporting you as delinquent to the credit bureaus. If you owe $25,000 or less, just go online to the IRS website and fill out the Online Payment Agreement.

3) Consider a loan to pay your tax bill
A bank loan or home equity loan (if you can get either) will carry a much lower interest rate than paying the IRS off over time under and installment agreement.

4) Ask the IRS about an offer in compromise
The IRS usually only grants these when:
a) a person can show that they have severe economic hardship; or
b) it’s doubtful that the taxpayer could pay what’s owed over the time the IRS has to collect the debt

Start by asking your accountant for which path he/she would recommend, since that individual is likely to be very familiar with your situation. Or, if you don’t use a CPA, call the IRS directly at 800-829-1040.

I am a Self-Employed Massage Therapist in Colorado. I Have Made Over $50,000 a Year, But This Year is Different. My Income is Down by Half, and I Owe $9,000 in Credit Card Debt. I Eat Only When I Have the Money to Eat. But I Spend Nothing More Than Gas and Dog Food as Extras Other Than Bills. What Should I Do Next?

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Author: The Money Coach

Anytime you have a substantially reduced income, or an outright elimination of income, it means you have to completely overhaul your budget. A few tweaks, changes and minor pullbacks here and there just won’t do. You’ve indicated that your income is off by 50%. As a result, you must drastically slash your current or previous spending, and also think about creative ways to raise cash. Otherwise, you risk falling deeper into debt.

How to Overhaul Your Budget

Before you look at “extras,” and any “luxuries” you may be spending money on, start by examining the very basics: like your phones, housing and car. Often, the things that we think are “necessities” have to be sacrificed just temporarily when there is a major shift in income. Since you are a self-employed as a massage therapist, it may be the case, for example, that you have multiple phones. Perhaps a cell phone, a business phone and a personal home phone. If so, consider which one – or maybe even two – of those phones you can live without on a temporary basis until you restore your income. This is the kind of thinking that will help you figure out how to get through this economic rough patch. This advice is also applicable to anyone who:

•   Has been laid off recently, for a long time, or expects to be unemployed soon
•   Has seen a big decline in self-employment income
•   Has had has their hours on the job cut
•   Has had their hourly salary or regular pay slashed
•   Has found a new job that is substantially less than the income previously earned

Lifestyle Choices

Overhauling your budget also means making tough choices about your lifestyle. An example of a major lifestyle change might be considering where you live. Do you rent or own? Can you find cheaper housing, a less expensive neighborhood, or is bringing in a roommate an option? Also, what about the car you mentioned? You said you drive only when you must. Can you sell the car and use public transportation? If you have car payments, is getting a friend or relative to take over those car payments at all feasible? I recognize that these are big shifts. But sometimes you have to dig deep when things are far more challenging than the norm. That’s why I usually recommend these strategies for people who are extremely deep in debt, or for those who have had major reductions in their income.

Negotiating and Bartering

As you consider your options, don’t forget about one of the best budget-saving strategies of all: negotiating. Whenever you are about to buy something, ask for a discount. Ask for a discount for paying for goods and services, like medical care, in cash instead of with credit. Ask for a discount if you’re at a store and you’re buying two or three of an item, instead of just one. You can even ask for, and negotiate, to receive products and services free of charge – if you’re willing to exchange your time, talents and services as well. For instance, you said you are a massage therapist. I imagine this is a stressful period for accountants. Instead of paying a CPA to do your business tax returns, maybe you can offer to provide a one-hour massage or treatment to your accountant. The idea is to think creatively about how you can both exchange value – without exchanging dollars. That’s a win-win situation for both parties and one that will help you to more quickly bounce back from your economic slump.

How did Lynnette Khalfani-Cox erase $100,000 in debt in 3 years? (askamoneyexpert.com)
How Debt Can Ruin Your Relationship (askthemoneycoach.com)
Best Careers 2011: Massage Therapist (money.usnews.com)

How long do I need to keep my business tax records?

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Author: The Money Coach

Q: In the May 2008 Issue of Health Magazine, Your Article Said You Only Need to Keep Your Tax Records Three years After Filing a Tax Return. My Understanding Was That the IRS Could File Up to Six Years Later. I Have a Small Business and Have Been Keeping My Records Six Years. What is the Current Ruling for This?

A: Under section 6501(a) of the Internal Revenue Code, the IRS is required to assess tax within three years after a tax return is filed. Therefore, most people need only keep tax records for three years after filing a tax return, because that is the time period during which:
a) a taxpayer can amend a tax return to claim a credit or refund; or
b) the IRS can assess additional tax

As you are self-employed, however, there are a few circumstances in which you should keep records longer. Keep employment-related tax records for at least 4 years. Also, if you ever under-report income by 25% or more of the gross amount shown on your tax return, then you should keep records for at least six years after you file a return. In such as case, the IRS has six years to assess taxes – not just three. What’s more you should keep tax records indefinitely if you file a fraudulent return, or if you do not file a return at all. But I assume that these last two scenarios don’t apply to you.

According to the IRS, “the exact length of time you should keep a document depends on the action, expense or event the document records.”

The IRS further offers this guidance:

1.   You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
2.   You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
3.   You file a fraudulent return; keep records indefinitely.
4.   You do not file a return; keep records indefinitely.
5.   You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
6.   You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
7.   Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Here’s the direct link to exact page on the IRS’s website that answers the question: How long should I keep records? http://www.irs.gov/businesses/small/article/0,,id=98513,00.html

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Posts Tagged ‘self-employed’