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The Biggest Tax Mistake You Are Making

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Avoid These Tax Mistakes
Avoid This Costly Tax Mistake

If you’re a small business owner or sole proprietor, the biggest tax mistake you’re making may have nothing to do with the actual filing of your return. It could have everything to do with your estimated tax payments—specifically when you fail to pay them. Failing to pay your quarterly taxes could lead to penalties come tax time. No one wants to be surprised by owing the government money on April 15th. To avoid that unpleasantness, you need to set aside some money each quarter to pay what’s essentially a self-imposed tax withholding.

Set Aside a Percentage

Estimated taxes are your responsibility if you are a sole proprietor, self-employed individual, partner or S corporation share holder who expects to owe more than $1,000 at the time of filing. As a sole proprietor, you need to get into the habit of putting aside a percentage of your income with each payment you receive. When it’s time to send in your quarterly payment, simply estimate what you owe that quarter by using the IRS Form 1040-ES. Your tax professional can also help you estimate how much you owe based on the previous year’s return. Quarterly payments are due on April 15th, June 16th, September 15th, and January 15th. You need to pay estimated taxes on any income not subject to withholding, which includes income from self-employment, alimony, dividends, interest, rent, prizes and sale of assets, according to the IRS.

Failure to Pay

If you do not make these estimated tax payments or don’t pay enough throughout the year, you could be subject to penalties when it comes time to figuring out your taxes in February. Those who expect to owe less than $1,000 in tax after withholdings and credits, or who have paid up to 90 percent of the current year’s tax, can avoid these penalties. There are a couple of exceptions to this rule, such as if you were the victim of a casualty or disaster, or you went into retirement or have a disability that prevented you from making estimated tax payments in a given year.

The penalty you are hit with depends largely on how much you owe to the IRS and how long it takes you to pay it. Penalties are imposed for the number of days taxes remain unpaid. This is why it’s important to pay on time and in full. If you do miss a payment, pay it as soon as you can. If you can’t, the penalty amounts to the unpaid interest on that payment. Keep in mind that you can’t deduct penalties for estimates taxes, even when they are business-related.

On the whole, though, if you are a business that does not deduct taxes from paychecks like standard employees do, that money has to come from somewhere and the IRS still wants it. By paying four times throughout the year, you avoid accruing unnecessary penalties that can hurt you every spring. You work hard at your business to earn every penny you make. Don’t give it up because you neglected your quarterly taxes.