Are you ready to pay taxes this year? Here's how I'm dealing with taxes.
It's been a crazy year for me, and my tax situation looks like a lot of fun. Not. The whole divorce thing means that the way income from my business is assigned changes, adding quite a bit in terms of self-employed tax. (The good news is that I get to start building more in Social Security benefits down the road — assuming they still exist later.)
I've been working with PayPal to try to get my 1099-K amended, but it's been slow going. So, I finally decided to do a quick and dirty estimate of what I'll likely owe in taxes this year. I assumed that I'd probably owe a little more than $15,000, and, according to the TurboTax TaxCaster tool, I'm not too far off. I know I have to pay taxes because I owe every year. This year is just a lot more painful than in the past — and it doesn't even include what I will owe in state taxes.
The key is to plan ahead and be ready for the big tax bill when it comes. Using tools that can help you figure out what it will take to pay taxes without breaking the bank.?While the tools offered by various calculators aren't exact, they can at least offer you an estimate. And I know I'm missing some deductions and other items (for instance, this estimate doesn't include my above the line deduction for moving across the country) or for some of the other deductions I know I have coming.
But it does give me a rather disappointing place to start from. Luckily, I've had the $15,000 number in my head since about two weeks after my husband asked for a divorce, so I've been saving up. (I know I should have paid more in quarterly taxes, but with the finances unsettled and everything happening, I just didn't. It will probably cost me, but not a ton, comparatively speaking.)
I also really hope that Eric Nisall, from AccountLancer, will be able to find things I know aren't included in that calculator. Because DAMN.
How to Prepare to Pay Taxes
Most home business owners like me know that they won't be seeing tax refunds each year. And, for the most part, that's ok. We get that all a tax refund means is that you've been giving the government an interest-free loan. But you need to balance that with the fact that underpaying by too much throughout the year can mean penalties. Make sure you make the required quarterly payments throughout the year to avoid steep penalties later.
Next, save up what you need. I automatically transfer a set amount from my checking account to a savings account designed for taxes each month. Most years, I use that money to make quarterly tax payments. I usually set aside enough to account for state taxes, plus a little extra, on top of my federal obligation. That way, if I owe more (and I usually do, although my new plan to make less than six figures could change that), I'm ready if there is an extra amount to pay.
Paying taxes is a year-round consideration. When you have a “real” job, that's usually taken care of for you. If you are a business owner, you need to plan your tax strategy more carefully so you don't wind up with an unexpected tax debt, and the biggest part of that is having a savings mechanism in place so that you don't freak out when it looks like you might owe $18,000 to Uncle Sam.
What to do When You Can't Pay Taxes
If you do end up with an unexpected tax debt, you do have options. Perhaps the best option, if you owe less than $50,000, is to use the IRS installment plan. You'll be charged interest, but compared to the interest and penalties that come from ignoring your tax debt, or compared to what a credit card issuer or another lender might charge you, it might not be a bad idea.
The IRS does accept credit cards, and you could get another loan, but the installment plan is often the best choice if you want to maintain liquidity and pay less in interest.
The worst thing you can do is ignore your mounting tax debt and/or fail to file your tax return. Ignoring the problem only makes it worse. If you aren't sure how you will pay taxes this year, start looking into options like the IRS installment plan. Then, start an automatic plan to save up for taxes in the future. Being ready to pay taxes by planning ahead can keep your bill from destroying your business.