So I just did a rough estimate and I'm short by about $4,000 for my quarterly taxes. I run a small landscaping business and this is my second year. Last year I had a refund so I got complacent and didn't set aside enough each month. Now I'm trying to figure out my options before the deadline. Has anyone been in this spot? I'm not looking for judgment, just practical advice on what to do next.
Taxes
I didn't set aside enough money for taxes this year
First thing, don't panic. The IRS penalty for underpayment is usually a percentage of what you owe, not a flat fine, and it's often smaller than people fear. You can also request a payment plan online. Have you looked at Form 9465?
Can you adjUst your withholding from a day job if you have one? That's what saved me one year.
i've been there. Two things that helped me: 1) call the IRS and ask about a short-term payment plan, they're more flexible tahn the website makes it seem, and 2) look at your expenses again. Are you sure you claimed everything? I found $1,200 in deductible mileage I'd forgotten about one year.
Also, the penalty is based on howw much you underpaid each quarter. If you can pay most of it now and set up a plan for the rest, the penalty stops growing on the part you've paid.
Do you have a separate business account? If not, that's step one for next year. I use a simple spreadsheet and move 25% of every deposit into a tax savings account. Boring but it works.
Could you get a short-term loan from your bank? Might be cheaper than the IRS penalty depending on your credit.
Before you borrow, check if you qualify for first-time penalty abatement. If you've had a clean record for the past three years, you can often get the penalty waived once. You still owe the tax, but it saves the extra fee ngl.
Thats a good point. I forgot about that. Also, if you file your return and pay what you can, the remaining balance can be set up in an installment agreement. The interest is lower than most credit cards.
What's your quarterly deadline? If it's soon, you might just want to pay what you can and deal with the rest later. The penalty for late payment is separate from the penalty for late filing, so file on time even if you cant pay.
I'd second the separate account idea. I use a second checking account with no fees. Every time I get paid, I transfer 30% immediately. It's out of sight, and I don't touch it.
One more thing: if you have a retirement account, you might be able to take a loan from it, but that's risky. I'd exhaust the IRS payment plan first.
How much is the penalty actually? I've heard it's around 0.5% per month of the unpaid tax. That's not nothiing but it's not catastrophic either.
Correct, it's 0.5% per month, plus interest. But if you set up a payment plan, the rate can drop to 0.25% for direct debit. Worth doing.
I appreciate the info. I do have a separate business account but I waasn't moving money out of it. I'll look into the payment plan and check my deductions again. The penalty abatement is new to me, so I'll research that.
Let us know how it goes. You're not the first and won't be the last. Next year you'll be the one giving advice.
One other thing: you can make an estimated payment now even if it's late. The sooner you pay, the less interest accrues. So if you can put something toward it this week, do it.