Did you file a tax extension? It's almost time to pay.
Remember when the IRS extended the annual tax deadline at the beginning of the coronavirus pandemic to July 15? Did you pay your freelance income taxes then —or did you decide to file an extension? If you opted to file an extension, it’s now time to file your taxes so you don’t miss the deadline of October 15 and end up being hit with late filing fees and penalties.
If your cash flow is slower this year due to the coronavirus pandemic, it’s still critical to pay as much of the tax you owe as possible. Failing to do so will subject you to more interest (if you didn’t pay by July 15, you’ve been accruing 0.5% interest on the balance since then, even with an extension), plus penalties on any tax obligations that remain outstanding after October 15.
As a freelancer, you should always try to pay your taxes in full, but if it’s just not possible for you to do so and you filed an extension, here’s a plan of action to help you mitigate as much of the negative financial impact as possible.
1. File your taxes by the October 15 extension deadline.
Even if you can’t pay the full amount of tax you owe, you need to file your tax return by October 15 to avoid paying a failure to file and failure to pay penalty. The failure to file penalty is 5% of the unpaid tax reported on your return.
The IRS generally does reduce the “failure to pay” penalty amount for any month where both a failure to file and failure to pay penalty applies. However, these penalties are still charged each month — or part of a month — that your return is late, for up to five months. If you think the IRS isn’t watching the calendar, think again: They will charge penalties even if your return is filed less than 30 days late.
2. Can’t pay in full? Work to reduce your tax obligation over a period of time.
If you don’t pay the full amount of taxes owed on your return when you file it and you can’t pay within a month, you can count on the IRS charging the failure to pay penalty on a monthly basis until the tax owed is paid in full.
Bottom line here: If you can’t pay your taxes in full and your balance is a moderate amount, it’s better to pay monthly than to wait and keep accruing interest and late payment fees. If you’re really in deep and owe the IRS a lot of money, keep reading; we address some options below.
3. Is your tax bill too much for you to handle in the short-term? There are options.
If you can't pay your balance in full, pay whatever you can now. You can apply for an Installment Agreement to pay the remaining balance. Entering into an Installment Agreement with the IRS may reduce future failure to pay penalties. Consulting with a tax professional can help you structure an agreement that eases your financial stress in this scenario, or if you have considerable unpaid tax obligations from previous tax years.
4. Get on track with your estimated tax payments.
It cannot be emphasized enough that for many freelancers, the key to avoiding paying additional fees, fines, and penalties to the IRS is to make sure you stay on top of your estimated tax payments throughout the year. Set up a separate bank account and put the money you need for each quarterly payment in there as your payments come into your business. This will help you avoid late payment fines, penalties and interest fees.
The IRS also applies late payment fines to estimated taxes. These are calculated separately for each quarterly installment. The number of days late is first determined and then multiplied by the effective interest rate for the installment period. Note that the next estimated tax payment is due January 15, unless you plan to file your 2020 return and pay all of your taxes in full by February 21.
With the October 15 tax extension deadline just a few short weeks away, it’s time to get your freelance taxes filed and paid — in full, if you can. While the extension to file your freelance taxes offers you a window to get your reporting in order and, ideally, come up with the money to pay your taxes, it’s best to close it on time to avoid paying the IRS more than necessary.
If you are struggling to keep current on your taxes or you are facing tax problems from previous tax years, be sure to reach out to a tax professional. They can help you navigate your individual situation with the IRS and create a tax resolution plan to help you take care of your freelance taxes now and in the future.
Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He provides tax, accounting and business articles for freelancers on his website, http://www.cpaforfreelancers.com — which also features a blog and a comprehensive freelance tax guide. Please note, due to the high volume of inquiries in regard to COVID-19, Jonathan is not able to respond to individual requests for information at this time.