Renee Sieradski is a Tax Specialist, visit www.phoenixtaxhelp.com or call 602-687-9768. Tax Season is upon us and people are generally stressed about having to gather their tax documents and fearful about whether...
Renee Sieradski is a Tax Specialist, visit www.phoenixtaxhelp.com or call 602-687-9768.
Tax Season is upon us and people are generally stressed about having to gather their tax documents and fearful about whether they will owe money or get a refund.
Those who skate stress-free thru tax season know a little secret: Plan ahead and pay in “REAL TIME”
What is “REAL TIME” when it comes to taxes?
The truth is that the IRS doesn’t want you to pay taxes by April 15th of the following year when your tax return is due. They require you to pay taxes in the year that you earn them, in real time. The concept of paying or owing by April 15th of the following year is largely an urban legend. Paying your taxes on April 15th is a grace period, but it comes with a hefty penalty, called the Failure to Pay penalty. Failure to pay means put simply, you didn’t pay your taxes in REAL TIME, in the year that you earned them.
If you are an employee, make sure you are having the correct amount of taxes withheld from your paycheck. You can do this by either checking with your tax preparer or by claiming fewer exemptions on your W4 that you give to your employer. I personally think that the W4 worksheet needs to be revised because it trips folks up into claiming far more exemptions than they should. All of my clients find it confusing. So here is a very simple way to skip the worksheet at the top half of the W4 and just fill out the important parts: If you don’t have any side income and just have a full-time job, your tax advisor may just have you claim one exemption. If you have children that you can deduct on your tax return, add these to you, but only if no one else is claiming them.
For Self-Employed Persons
If you’re self-employed, and no employer is withholding and paying taxes for you, then it is up to you to do this yourself. Again, with the concept of REAL TIME, when you earn you money, the IRS gives you a slightly easier way to pay your taxes, quarterly.
This means you can pay your entire year in four installments. The due dates are 4/15, 6/15, 9/15 and 1/15 of the current year that you are earning the money. Another way to think about the logic of paying your taxes when you earn the income is as follows: If you were an employee, when would you pay your taxes? They would be deducted from your paycheck as you earned the income every week or every two weeks and then swiftly wired to the IRS. If you think of it this way, then the concept of paying your taxes as your clients pay you is not a new idea. You own a company and IRS requires you to pay the when you earn your money.
Ideally, when you file your income tax return in April, it should be a break even return, or very close to it. This is the best way to save you money and not pay penalties and interest.
In order to avoid penalties, the IRS requires you to pay in the greater of the following quarterly: 100% of the previous year’s taxes or 90% of the current year’s taxes. The IRS allows this calculation because they know that business owners are making estimated projections and as a result, you can use the prior year as a guideline and then increase your estimated withholdings if you are having a better year.
I had a client in my office this week and I was explaining the concept of REAL TIME payment of taxes to save money on interest and penalties, and my client replied, “So I should pre-pay the IRS?” “No, I replied, pay them in REAL TIME, when you earn the money to avoid penalties and interest when you file your tax return the following April.”
It is actually not viewed as pre-payment to pay the IRS in the year that you earn your income. If you do not pay in REAL TIME, you will be subject to Failure to Pay penalties.
In summary, I encourage you readers to turn over a new leaf in 2018 and choose a drama free tax season. After all, as recovering people, we want to take the shame and fear out of finances, and choose to live our lives with less drama and more calm, right?
Join the American taxpayers who sit back and relax during tax time, knowing that they have paid their taxes and that their April 15th filing will be just that, a paper filing with little or no taxes due or refunded.