Down to the wire on your taxes? Time to file an extension
If you haven’t filed your federal income tax return yet, you likely don’t need to be reminded that the April 15 deadline is coming—fast.
Whatever the reason is for not filing your taxes up to this point (the dog ate your 1099s maybe?), if you’re not planning on getting them submitted by Tax Day you should consider filing Form 4868, the Application for an Automatic Extension of Time with the IRS.
In addition to your federal taxes, remember that if you need more time to file your state tax or other returns specific to the state(s) that you have a tax nexus in, you are likely required to make separate extension filings.
For example, if you are a freelancer in New York State, you would need to file—even if you don’t actually owe any tax—a New York State tax extension.
Freelancers living in New York City and surrounding counties should also file an extension for the Metropolitan Commuter Transportation Mobility Tax (the MCMT) by April 30 and, if applicable, the New York City Unincorporated Business Tax extension for NYC freelancers.
Be sure to check the specific requirements for filing extensions in the states in which you live and do business.
While filing an extension buys you some time, six months to be exact (making your tax return due on Oct. 15), it doesn’t remove the obligation of paying your taxes on time, which means you must either: a) estimate what you owe and pay it now; or b) pay later and be subject to interest on the tax you owe and, potentially, late-payment penalties.
Which option should you choose? Let’s take a closer look at each one:
Option A: File an extension and pay estimated taxes now.
If you just need more time to get your documentation together or if you need to get a replacement for a piece of documentation in order to complete your tax return, and you have enough information to estimate the taxes you owe, this may be a good option for you.
If you have a freelance business, you should be prepared to pay estimated taxes anyway, so if it’s just the paperwork that is holding you up from submitting your tax return, then filing for an extension makes sense—that way you will avoid the late payment penalty and failure-to-file penalty.
Option B: File an extension and pay later.
Even if you think you owe a lot of tax and don’t have the money in hand to pay the IRS, you don’t want to choose this option unless you absolutely have to. Here are two reasons why:
- You will pay interest on any tax owed that is not paid by April 15 until it is paid. The IRS interest rate on underpayments changes quarterly, but it is usually around 3 percent—adding to your financial burden.
- You may also face a late-payment penalty charge, unless you can prove that you have a reasonable cause for not paying on time. Usually “reasonable cause” means catastrophic occurrences such as the death of an immediate family member, a major illness, or if your tax documentation was destroyed in a fire or some other disastrous event.
Join the nation's largest group representing the new workforce (it's free!)
Reduce your pain: It’s better to apply for an extension than do nothing at all.
While Option A is obviously more desirable than Option B, filing an extension and paying later is much better than not filing a tax return at all. If you do not file a return or apply for an extension by the April 15 deadline, you will be subject to a failure-to-file penalty, which is significantly more than the failure-to-pay penalty.
The failure-to-file penalty is 5 percent per month or partial month, up to a maximum of 25 percent of what is owed. Even if you have a relatively small unpaid tax bill, you will still be subject to this penalty if you don’t file on time.
If you file later than 60 days after the April 15 deadline, the minimum penalty rises to the smaller of $135 or 100 percent of the unpaid tax. Keep in mind, this penalty is on top of any other interest charges or late-payment penalties that you are assessed.
There are options for those who just can’t pay their taxes right now.
If you just don’t have the money to pay your taxes, don’t despair—there are options for you. You could get a credit card offering no interest for a period of time and pay your taxes using it (note that the IRS does charge a convenience fee for paying with a credit card) as long as you think you can pay it off in full before interest will apply on your balance.
Alternatively, you could ask for a loan from a family member, friend, or financial institution. In addition, the IRS will work with you, offering payment plans to help you meet your tax payment obligations.
Take action now…file an extension before the April 15 tax deadline passes.
If you are not going to be able to file your taxes by April 15, applying for an extension—and making either a full or a partial payment of the taxes you owe—can make your situation much better, as opposed to doing nothing at all and being subject to stiff penalties.
In any case, if you haven’t filed your taxes yet and you are not sure what you should do, seeking the advice of a tax professional can help to ease your immediate burden—and get you back on track for next tax season.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for consultants across the country. His website, www.cpaforfreelancers.com, has a resource section with how-to articles and information for freelancers.