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A few years ago, I ran two small businesses, including one as a self-employed freelance writer. When tax season rolls around, I struggle to keep track of my quarterly estimated taxes, organize 1099s and find out which business expenses are deductible.
After speaking with my tax man, I decided that I could not make the usual deadline of April 15th and had to request an extension. Fortunately, that year, the state of California offered a automatic tax extension to all residents until Nov. 16.
While the extra time allowed me to compile everything I needed to give to my tax professional, I wish I had filed on time. For one, I can use the big tax refund the IRS owes me to put towards my financial goals this summer. Plus, late filing puts me back into preparing for next tax season.
Depending on your situation, you may be able to file this year’s tax extension when tax season begins later this month. Here’s what to know if you need more time to submit your return.
Why do you need to file an extension?
Since I haven’t kept up with all my financial information and records, I don’t feel confident that I have enough time to double check everything and compile it for my accountant in a timely manner.
Whether you’re waiting for records or paperwork or dealing with a family emergency or natural disaster, millions of US taxpayers are filing late because they struggle to complete the paperwork in time for on the April deadline.
Whatever your reason, filing an extension gives you an extra six months to submit your returns. You must file your returns before the October 15 deadline or you will be hit with a late penalty. However, you must pay any taxes you owe by the spring filing date (more on that below).
Can you also extend the payment deadline?
If you know you will get a refund when you file your return, there is no penalty for filing your return late. However, if you find out that you owe money to the IRS, you must make the tax payment deadline. Although it may seem backward to pay any taxes you owe before submitting your actual return, it’s all about estimation.
For example, if you’re using tax software like TurboTax, just input the information you have and make your best guess at whatever you’re missing. You can get an estimate of what you may owe the IRS, even without submitting your return.
If you’re just waiting for one piece of information, like a business expense, Janet Berry-Johnson, a certified public accountant and founder of Firefly Financial Planningrecommends using last year’s numbers.
If you don’t have big changes from last year’s tax return, you want to make sure you want to pay at least what you owed last year, says Tai Stewart, an EA and founder of Support Financial Solutions.
If you don’t pay what you owe on your taxes when you request an extension, you could be hit with an underpayment penalty. To avoid this penalty, you must pay off at least 90% of your debt this year or 100% of what you paid last year, whichever is less.
Why is it better to file by the spring deadline?
There are many reasons to file your taxes by the April deadline. For example, you need to get your complete tax return to get approved for a mortgage, apply for funding for your small business or complete your FAFSA for federal student financial aid, says Stewart. .
Filing earlier in the year can also help you avoid identity theft, according to Berry-Johnson. Identity thieves can get your name and Social Security number and file a return to claim a refund before you do. If that happens, your tax return may be rejected when you file it.
“At that point, you have to file your paper return and send it in with this tax form and a copy of your photo ID, which can take months for the IRS to process,” Berry said. -Johnson.
If you’ve been a victim of tax fraud or identity theft, reclaiming your tax refund can take up to two years, adding to the headache and hassle.
What if you can’t afford to pay your taxes on time?
Since I owe the IRS money for one of my business endeavors, I decided to request an installment plan, which is a simple process.
Berry-Johnson says if you can’t pay all your taxes owed by the deadline, pay whatever you can. Don’t avoid filing your return just because you can’t cover the payment in full. You don’t want to get hit with penalty fees and interest charges.
“If you owe $500 and only have $100, pay the $100,” he said. Although many taxpayers fear working with the agency, the IRS is used to working with people’s situations. Here are some payment options through the IRS:
Payment plan: You can set up a payment plan through the IRS website or by calling the IRS and setting it up over the phone. There is no setup fee, but you must pay the taxes owed within 180 days.
Installation agreement: Another option is a installment agreement (also called a long-term payment plan), where the IRS will drop your failure to pay half. There may be a setup fee, but the IRS may waive it entirely if you earn a small amount of income. You have up to 72 months to make monthly payments to pay off your balance.
What are the penalties for not filing your taxes?
Not filing your tax return on time (or failure to file an extension) will cost you 5% of your unpaid taxes each month. There is a cap of 25% of your unpaid tax.
In addition, there is a failure to pay penalty, which is 0.5% of the unpaid amount for each month you do not pay your IRS debt.
If you fail to file and fail to pay a penalty, the maximum you owe is 25%. In addition, there is interest charged, and the interest rate changes every quarter.
You can avoid penalties and interest by paying your debts by the due date or requesting a payment plan.
How do you file an extension?
File an extension is a straightforward process. You can request online at IRS.gov or mail in a coupon below 4868 Tax Form. You must include your name, address, Social Security number and how much you will pay for your extension. If you use tax prep and filing software, you can also request an extension through the software.
If you file an extension, some states will automatically extend your state return as well, Berry-Johnson said. However, some states require you to file a different extension.
How can you file your taxes on time?
For the past few years, I have decided to stay on top of my accounting. I reconcile transactions in my QuickBooks Online account regularly. I also complete any required tasks through Gusto, my payroll service.
While I slip up from time to time (life happens), I work with a bookkeeper who helps me settle any discrepancies and makes sure everything is ready come tax time. Tax pros tend to be busy and less available starting in December, so try to touch base with them first.
“If you are working with a tax professional such as a CPA or EA (federal tax practitioner or enrolled agent) to help you file your taxes, stay in communication with them and check if you need to to submit the necessary documents and information,” said. Stewart.
Here are some tips on how to file your taxes on time for next tax season:
- Create a tax file at the beginning of the year, a designated place to keep your tax-related forms and documents, whether digital or paper.
- For small business owners, make sure your books are up to date.
- Gather what you can and input your best guess for anything you’re missing. Once you have all the information you need, you can go ahead and file.
