You’ve had just over a month longer than usual to file your freelance taxes, due to the IRS extension of the annual tax deadline to May 17. However, if you were stressing about paying your tax bill back in April, it’s doubtful that you are feeling more confident about it now. But if you haven’t filed your freelance taxes because you can’t pay your tax bill, it’s only going to hurt you in the long run. Now’s the time to get your taxes filed and make a plan to take care of your remaining tax obligations as soon as possible.
Here’s what to do if you can’t tackle your freelance tax bill when you file your return:
1) File your tax return so you don’t miss the May 17 deadline and end up getting hit with late filing fees and penalties. You can file an extension to October 15, but that won’t eliminate the late payment fees and fines you may be subject to. It just gives you more time to file the return.
2) Pay as much of the tax you owe as possible, because failing to do so will subject you to more interest. If you don’t pay by May 17, you’ll start accruing 0.5% interest on the balance due, even with an extension. In addition, you’ll pay penalties on any tax obligations that remain outstanding after October 15.
3) Make sure you file your return to avoid paying a failure to file and failure to pay penalty. Regardless of whether you file by May 17 or extend your filing window to October 15, 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 still charge penalties even if your return is filed less than 30 days late.
Bottom line: If you can’t pay your taxes in full and your balance is a moderate amount, it’s better to pay some of it 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 will address some options below.
4) Remember to pay your state and local taxes, too. Depending on where your business operates, you may have state and local taxes due this month as well. Be sure to check with your state and local tax authority to determine when those deadlines are and your tax rate so you can avoid fines and penalties for these tax obligations.
5) Investigate options to help reduce your stress. If you can't pay your balance in full, pay what 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.
6) Evaluate 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 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 of estimated taxes. 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 June 15, 2021.
The May 17 filing window for your freelance taxes is closing quickly…
With the tax filing deadline just a few days away, it’s time to get your freelance taxes filed and paid — in full if you can. If it’s just not possible to pay your taxes, make every effort to file your return on time or request an extension to avoid paying the IRS more than necessary.
Staying current on tax payments is no easy task when you are a freelancer. If you are facing a tax bill you can’t pay or tax problems from previous tax years, be sure to reach out to a tax professional. They can help you manage your individual tax situation and create a 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.