One of the many “joys” of being a self-employed freelancer is paying estimated taxes. Four times per year, you’re basically supposed to make an educated guess about what your tax liability will be over the course of the year, and pay accordingly. (Some accounting platforms, like Quickbooks, will help with this. Accountants can also help, obviously, as can online tools.)
But what if you’ve messed up? Maybe you didn’t pay estimated taxes for more than a year, for example - so now what?
Here’s how to right the situation, if you got your estimated taxes wrong.
- Don’t just ignore the problem. It may be tempting, but the sooner you take action to try to fix your tax error, the better off you’ll be. If you’re lucky, (or unlucky, depending on how you look at it) and have to engage with the IRS, they will hopefully be a little more forgiving if you can prove that you addressed your tax issue as soon as you became aware of it.
- Get current on filing your tax returns. This might mean preparing to file taxes not just for this year, but possibly as far back as the previous six years. Yes, really. This means finding and organizing all of your available records, including 1099s, receipts, invoices, and any other documentation, and then completing all past due tax returns. Fun times.
- Prepare to pay up. This is the part that will hurt the most: you need to catch up on your current year estimated tax payments as quickly as possible. This will not only reduce any penalties or fines that you may have to pay for the previous years, it will also help convince the IRS that in the future, you can be counted on to pay your taxes on time.
- Try to reduce the penalties and fees. If your tax non-payment issue goes back a few years, then you’ll need to take care of any late filing and payment penalties that have accumulated. If you can show that there was a good reason for your lapse in tax payments (i.e. “reasonable cause” which, according to the IRS, exists when a taxpayer shows that they “exercised ordinary business care and prudence in determining the tax obligation, but nevertheless failed to comply”), you may be able to ask for a “penalty abatement.” In order to obtain this, you’ll have to be able to make a good argument as to why the penalties should be reduced in your case. If this is a one-time issue and you have a past history of paying your taxes, you might be granted a first-time (and only-time!) waiver.
- Create a plan. Once you figure out what you’re going to owe and minimize it as much as possible, you need to figure out how you’re going to pay up. If you can’t pay it all in one chunk upfront, you can ask the IRS to make other arrangements based on your documented ability to pay. Remember, the IRS would prefer to work out a payment plan with you than not get any of the money you owe, so chances are they’ll be willing to work with you.
These are the basic steps to take, but obviously, if you’re really in over your head, it might be worth getting professional help from a CPA. They may be able to help you save more than you’ll spend on their services.
And it goes without saying that an ounce of prevention is worth a pound of cure… the IRS takes a pretty close look at self-employed individuals, so do your best to track all of your income, keep good records, and pay what you’re supposed to pay! Taxes suck, but being in trouble with the IRS sucks worse.