Taxpertise Tips - Bonnie Lee


What if I can’t pay all my taxes?

Dear Bonnie,  I own my own business and was surprised at how much tax I owed for 2013. I hadn’t paid enough in with estimate tax payments. Now I am faced with a 2013 tax liability and estimated payments for 2014. I’ve got enough to pay one or the other. Can I file an extension for 2013 and pay the first installment of the 2014 tax? What should I do?

N.J. Sonoma

Dear N.J.,

An extension to October 15, 2014 is only an extension of time to file; it does not grant an extension of time to pay. Therefore, if you anticipated a tax liability, it is important to remit payment with the extension form.

I encourage you to give the 2013 liability priority. The penalties are not as harsh for failure to prepay a current estimated payment as they are for failure to pay the prior year liability. You have the remainder of the year to catch up.

Regarding estimated payments and penalties, the IRS states: “Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percent of the tax for the current year, or 100 percent of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505 “Tax Withholding and Estimated Tax” for additional information.

Business owners might be facing another dilemma as well: should you pay your income taxes or pay your payroll tax liabilities? If you are a monthly depositor of payroll taxes, your March liability was due on April 15.

The answer is to always choose payroll tax liabilities over income tax liabilities. Here’s why: The IRS views payroll taxes as a trust account; it’s not your money. When you promise to pay a person $20 per hour, let’s say, you end up writing a check with net pay equivalent to approximately $15 per hour give or take.  The difference between the gross pay and net pay are withholdings: the employee’s federal income tax liability, state income taxes, social security and Medicare taxes (which you are required to match).

You are required to turn these withholdings over to the government. Failure to do so can create not only severe penalties and interest,  but the exacting of a civil penalty not on your business but on you personally for 100 percent of the tax liability. Ouch! Be careful, the severity of a civil penalty may put you out of business.

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