Top 3 Groups With IRS Debt

This form can be the death of you!

This form can be the death of you!

When it comes to running afoul of the IRS, certain generalities often come to mind regarding the types of people. Terms like deadbeat, scofflaw, tax evader, tax protester and the like tend to come to mind. But did you know that most of the people who generate IRS debt actually didn’t intend to? Furthermore, did you know that most of them (professionally) will fall into three categories? Let’s take a deeper look.

Independent Contractors. Working for yourself can be a dream. Whether it’s being a consultant or driving for Uber on the weekends, being your own boss can feel liberating. Oftentimes, when one is first approached with being a contractor, one of the things that will be “sold” to them is how no taxes will be taken out of your check. How can that be? We’ll that’s because most independent contractors are paid via Form 1099-MISC from a tax perspective. While earning a bigger check can sound wonderful at the onset, it’s a thing that come back to bite you come tax time.

Attorneys. If you’re an attorney who works in private practice for yourself, then you can suffer the same consequences as those who are independent contractors. This is because those who report compensation to attorney’s also tend to do so via Form 1099-MISC (see a trend here). If you look at the form, you will notice that box 14 is labeled “Gross proceeds paid to an attorney.”

Realtors. Realtors are another group that also tend to get into tax trouble with the IRS. Can you guess why? Correct; it’s because they receive their commissions via Form 1099-MISC!

The Problems Caused By Form 1099-MISC.
Being paid as a contractor is not an issue. They key is to know the difference in how an contractor deals with their taxes versus an employee. In this post on our sister site, one can learn some of the details. However, the summary version is that when you work as a contractor, YOU are the one who has to withhold AND remit the taxes to the IRS and state taxing authorities.  How do you do this? Via estimated tax payments.

Key Takeaways?

  • Those as independent contractors are at greater risk for running afoul of the IRS
  • If you will be paid via Form 1099-MISC, you need to consult with a tax professional
  • You will want to make sure that you are doing estimated tax payments (a.k.a. quarterlies)
  • If you don’t pay enough in estimated taxes, you can quickly generate a tax bill that you can’t satisfy.

Are you an independent contractor/freelancer who needs help staying in Uncle Sam’s good graces? Give us a call or shoot us an email. We’d be happy to tell you the steps you need to take and assist you if needed.

Understanding Estimated Taxes

When you work for yourself you generally have your employer withhold federal and state (if applicable) income taxes from your wages.  Then at the end of the year it becomes a calculation of if you had enough withheld (i.e. you get a refund) or have to make a balance due payment.

But what if you work for yourself (i.e. self employed) and no one is “withholding” anything from your check?  Then this post will clue you in on how you make your payments and keep Uncle Sam happy.

What is estimated tax?
Estimated tax is how you pay your taxes when you have income that isn’t subject to withholding.  Just think of it as what your employer does for you when you don’t have an employer ( so to speak).

Who has to pay it?
If you are filing as a sole proprietor (Schedule C), or receive income as a partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments.  Fortunately, you only have to make payments if you expect to owe tax of $1,000 or more when you file your return.

If you own a  corporation, be advised that  you generally have to make estimated tax payments if you expect it to owe tax of $500 or more when you file its return.

When are payments due?
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

For the period:              Due date:

Jan. 11 – March 31           April 15
April 1 – May 31                June 15
June 1 – August 31          September 15
Sept. 1 – Dec. 31               January 15  of the following year

How do you pay it?
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.  The worksheet in Form 1040-ES will help you figure the amount.  You can then make your payment(s) using the voucher contained within or electronically via the EFTPS system.

Each state will have a similar form or electronic platform for you to pay the corresponding state taxes.  In our home and surrounding states you would use:

Illinois Form 1040 ES
Indiana Form ES-40
Wisconsin Form 1-ES
Missouri Form 1040ES
Iowa Form 1040ES
Kentucky Form 740ES

What happens if you don’t pay it?
If you didn’t pay enough tax throughout the year (either through withholding or estimated tax payments),  you may have to pay a penalty for underpayment of estimated tax.  You can avoid this penalty if you owe less than $1,000 in tax after subtracting withholdings and credits, or if you pay at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

Need help estimating your tax liability?
Give us a call at 1-844-829-3788 or shoot us an email via the link below and we’ll be happy to assist you with your quarterly projections, filling out your forms or just coaching you through the process.