Weeks ahead of the next quarterly deadline for filing estimated taxes (September 15) marks a good moment to look at what these filers often do wrong.
These clients, possibly a growing segment of your practice, given business startups and recent groundswells in employment structures, sometimes need a lot of help to keep up on taxes. “Poor planning is their biggest problem,” said Cheryl Morse, an EA with Emerging Business Partners in Wellesley, Mass. “Anything from letting their bookkeeping get behind to not having the money to pay their estimated tax.”
“Not making estimates at all and not anticipating what they’re going to earn by the end of the year,” said Jeffrey Schneider, an EA with Florida-based SFS Tax and Accounting Services.
Errors vary by type of returns, whether for a business requiring quarterly payroll returns or for individuals requiring quarterly estimates, said EA Roy Frick of Ocean City, Md.-based Fairway Services Ltd. and Frick Accountants Ltd.
“We call all our business clients each quarter as a reminder that they have payroll tax returns due,” Frick said. “Individual estimates are another situation. We provide them vouchers and envelopes with their returns and advise them that if situations change to contact us. In all cases, we try to prepare safe harbor estimates. If they had a large capital gain in the prior year, that can be a problem, so we need to make sure they are adjusted during the year.”
Misconceptions about estimated quarterly taxes run rampant among taxpayers if newly self-employed taxpayers realize such taxes exist at all. “Every year, my tax return instruction letter to all my clients states that they need to call me once it is determined that their tax situation may have changed. Very few do,” Schneider said. “Is it because of potential fees? Because they don’t want to deal with taxes until April? Or is it just laziness? I’m sure it’s a combination. Whatever their reason, it can be a big dilemma if the client owes more than they anticipated come April 15.”
Self-employment taxes, a common feature of quarterly filing, are minefields for potential audits and penalties little understood by most affected taxpayers. “The failure-to-pay penalty is really interest on the monies the IRS did not receive by a certain date. In most cases, it is not a huge number,” Schneider added.
“For my business clients, their income tax withholdings (via wages) are enough to cover their W-2 wages. The pass-through number can cause the issue. When a client has a large K-1 income amount, they may owe tax with the return. Many of [my clients] believe that they can make better use of their money than the amount they have to pay in the penalty. It is when they underestimate that ultimate number that causes the highest anxiety,” he said. “That’s when they kill the messenger.”
Schedule and remind
“I emphasize the bookkeeping aspect, and make sure they have a clear understanding that knowing their financial condition at any moment in time affects pricing and hiring, not just taxes, and can’t be put on the back burner,” Morse said. “I really drive home that letting this get out of control kills many good businesses.”
“When April 15th comes around and they do not have the cash to pay, File an extension.’ they say,” Schneider reported. “I explain that an extension is an extension to file, not to pay and that monies have to be paid with the extension. I have to explain that the IRS can void the extension and that late-paying penalties will be assessed on any outstanding balance, plus interest. Many clients file zero extensions and will deal with the aftermath later.”
“I advise clients to open another account at their bank and transfer 25 percent with every deposit,” said Mike Habib, an EA in Whittier, Calif. “This way, the account is funded when payment is due.”
Massachusetts EA Morse makes sure to schedule appointments for such clients two weeks before estimates come due and reminds them of those appointments “often twice” in the weeks just before the appointment.
“We also schedule the next appointment while they’re with me,” she added. “Scheduling the year in advance always seemed to lead to conflicts for one of us.”