Tax day takes on a whole new meaning when you’re self-employed. When you’re the employee of a company, you simply file your returns and cross your fingers that you get more back than last year. When you’re self-employed, it means pulling together all of your receipts from the entire year, making sure you’ve made all of your quarterly payments, and crossing your fingers in hopes that you’ve saved enough to cover your bill. Any miscalculations along the way could lead to getting blindsided by larger bill than expected on tax day. Due to a major lack of resources available to help folks who are self-employed manage their tax obligation, this year-end surprise actually more common than you may think.
If you find yourself coming up short on tax day, don’t panic! Take a deep breath, and follow these steps to keep the tax man off your front porch:
File your return
The absolute worst thing you can do if you don’t have enough cash to cover your bill is to not file your return at all. For each month your return is late, you’ll automatically be charged a failure-to-file fee of 5% percent of what you owe. This penalty won’t exceed more than 25% of that total amount, but I think it goes without saying, having to pay a dollar over what you owe sucks. The best thing you can do is file your return on time and pay as much of the obligation as you possibly can. You’ll still have to pay a failure-to-pay penalty of 0.5% of the amount owed each month but with at least paying some of that obligation, this penalty will be a lot more palatable.
Apply for the IRS installment agreement
If you know you’re going to need a little bit of time to pull together some cash, the IRS allows for you to make monthly payments through their installment agreement. As long as you’ve already filed your return and owe less than $50,000 you probably qualify, however, there are still some fees and penalties associated with this method. Depending on the how you choose to actually remit cash to the IRS, you’ll be charged a setup fee ranging between $31 (direct debit – online payment agreement) and $225 (regular installment agreement). You’re also still on the hook for late payment penalties, but with the acceptance of your installment agreement, this will be cut back to 0.25% of the amount owed.
Apply for an offer in compromise
If you experienced a financial emergency or simply don’t have the means to cover your tax obligation, you can potentially settle your debt for less than the full amount owed. To do so, you’ll need to submit an application for an offer in compromise. This is the IRS’s way of giving a fresh start to taxpayers who’re unable to pay or have run into special circumstance that hinder their ability to pay off their debt. The IRS is fairly strict on the applications they accept so you’ll want to make sure that you’re qualified before submitting your offer and paying the $186 application fee.
Know your obligation
At Painless1099, we know all too well how complicated calculating your obligation can be. Not to mention, any miscalculation can land you right back in the same position of not having enough saved to cover your bill. Current forecasting worksheets and tax estimators out there generally only focus on either the federal or state portion of your obligation, leaving you to with a half-painted picture of what’s to come. Not to mention just working through those resources alone can be so complicated that you’ll feel like you’re filing your actual tax return. That’s why we took it upon ourselves to build a one-stop-shop self-employment income tax calculator. Calculating your obligation only takes a minute or two and you’ll have everything you need to make an informed decision on how to best pay for your obligation.
Avoid ending up in the same position
The best way to make sure you don’t come up short on tax day is to separate some cash into a dedicated tax savings account each time you earn 1099 income. Having a dedicated account keeps your tax savings out of arm’s reach so you know you’ll have enough saved to cover your obligation at the end of the year. The good news is that we’ve made this super easy to do! Painless1099 is a smart savings account that automates this entire process. When you sign up, we’ll set you up with new savings account with our banking partner. As your clients deposit your income into your new account, we’ll automatically calculate and withhold the amount you need to set aside for taxes right in your Painless account. The rest, what’s safe for you to spend, is transferred directly to your personal checking account. It’s essentially the W2 withholding you’d have as an employee of a company, but it’s designed specifically for your 1099 income. Avoid that “Oh, Sh*t!” moment on tax day – automate your tax withholding with Painless1099.
Entrepreneurs, do you have any small-business tax questions? Ask us in the comments below!