Why it is so easy for entrepeneurs to get into income tax trouble...but how do you get out?

Why it is so easy for entrepeneurs to get into income tax trouble...but how do you get out?

Full article: https://ift.tt/2XoKQr4 Self-employed? Owe IRS taxes but can't pay? Just what can be done about this? When you work for yourself, if you lose a customer or go out of business you often don’t find any safety net. Cash flow for many small business owners can be the most important metric to measure. Light cash flow is real scary! Yet, a level of success can happen, but can be hard to recognize. So many freelancers become very leery or unsure about sending off huge estimated tax payments to the IRS. When you see an operating account looking healthy, the last thing you want to do is empty it by sending it to an agency that you probably don’t feel that good about. Many self-employed individuals simply can’t make the estimated payments they need to because it is too scary. The key to success is to be disciplined and make estimated tax payments without thinking about them. A trick can be making estimated payments every month, or even weekly. That way, the checks are smaller and more regular, so your emotions are easier manage. Problem 2: No one to withhold taxes for you During the 2019 tax season when your 2018 business tax return is due, there will be a whole set of new entrepreneurs caught off guard with the IRS. This problem is closely tied with our first problem. In 1943, the federal government forced employers to withhold taxes for employees. The reason this was done is that the US income tax began to apply to nearly every taxpayer during WWII. The expanded application of the code would completely fail without this. Most people, if let to their own devices, would not be compliance with the IRS without the promise of a refund check once they file. But the self-employed have no one to file their withholdings for them. They are responsible for themselves. There is no one to force discipline, a discipline that can be so critical. So one trick is to find someone, a friend, a spouse, a tax professional to give you a nudge about your estimated tax payments. Problem 3: High & kind of hidden self-employment taxes If you could set aside 16% of your income for retirement, you’d have a pretty good retirement, wouldn’t you? For instance, in Australia, employers and the self-employed are required to put at least 9.5% of they gross pay into a retirement fund. This was the privatization of social security. The result? Australia is beginning to have a lot of middle class individuals become millionaires. But here in the US we weren’t so lucky. Attempts to allow people to be responsible for their own retirement were shut down. So we are are stuck with the same broken retirement system that forces freelancers to pay about 16% of their net income to the IRS for medicare and social security taxes -- all for the privilege of working for oneself. This massive tax bite is typically ignored for planning, but often times, the self employment taxes are far more than federal income taxes. The key is to understand exactly how much in self-employment taxes you need to pay. And sometimes to look to see if a change of entity to say an S- corp makes sense in order to reduce self employment taxes. These three problems for the self-employed lead to an IRS penalty treadmill that doesn’t ever seem to end. So let’s suppose you get behind for one year. If you file, you see you were assessed penalties. So you go and try to throw money at that balance. And by the time you nearly paid off that balance, another year with more taxes due and more penalties is added to the pile. This leads to a bitter irony: Some of the people who have the hardest time paying taxes wind up paying the most to the IRS. Now if you do owe, Maybe you decide not to file. And not for just this year. But for all years you’ve owed. And now maybe you have five, ten, twenty even thirty years of unfiled returns. So how can we fix this? No matter whether we are dealing with just one tax bill for one tax year, or decades of tax problems our solution always starts the same. We always get our clients - no matter what - to start making estimated taxes. As once we make the right estimated tax payment, then our clients are no longer adding to the problem. If the client is adding to the problem, then we can get a real plan in place. A plan that is realistic and is based on what our client can pay, and also takes into account current tax compliance and all the necessary expenses to run a business. Whether your solution is an offer in compromise, a partial or full pay installment agreement, we enjoy getting our clients the breathing room they need so they can focus on their business, not wondering what the IRS is going to do next. https://youtu.be/wkbOce8XxEc IRS Medic