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rflem04
New Member

I haven't paid any taxes all year and I'm self-employed. I thought I could pay at the end of the year... How much will I be penalized and what should I do at this point?

Apparently I'm not a smart person, and spent the entire year thinking I could just pay at the end. I asked a tax professional friend and she gave me all these circumstances that made it seem like I would be okay to wait until the end of the year. Now I'm doing more and more research and realizing she probably is not right. This is my first year being self-employed so I am new to all of this. From what I'm reading it sounds like I'm going to owe 50% total on taxes now at the end of the year at least. Lets say I made a generic amount like 40k and didn't pay any taxes on that yet. What kind of penalty am I going to be looking at and what should I do at this point? Thanks for your answers.

1 Best answer

Accepted Solutions
TomYoung
Level 13

I haven't paid any taxes all year and I'm self-employed. I thought I could pay at the end of the year... How much will I be penalized and what should I do at this point?

The possible issue you face when you prepare your income tax return is being "underpaid."   That's a piece of jargon that has a specific meaning under the income tax laws.

The US income tax system is a "pay as you go" system, and most people "pay as they go" by having income taxes withheld from their paychecks.  For people with significant amounts of income NOT subject to withholding there's an alternative way of paying taxes.  Namely, you pay "estimated taxes" on a roughly quarterly basis, sending in checks to the IRS on 4/15, 6/15, 9/15 and 1/15 of the following year, accompanied by a "voucher" called Form 1040-ES.

If you are self-employed you owe income taxes on your net self-employment income, (amounts collected from clients minus expenses associated with that income), PLUS you owe self employment taxes, (Social Security and Medicare), on that income at roughly a 15% rate.  

Simply because you have to send in a large check when you mail off your income tax return does not, in and of itself, mean you are "underpaid" and subject to underpayment penalties.

Most taxpayers will avoid being underpaid if they:

1) owe less than $1,000 in tax after subtracting their taxes WITHHELD and available tax credits,

OR

2) if they paid at least the lesser of
       a) 90% of the tax for the current year, or
       b) 100% of the tax shown on the return for the prior year.  (If last year's return shows AGI over $150K (for married filing jointly) then change that "100%" figure to "110%.)

So, for example, if in 2013 you had little income and accordingly had just a small income tax liability, then paying that same amount in 2014 via quarterly estimated taxes would put you in that 2)b)  "safe harbor" and no matter how large a check you paid with your 2014 income tax return, you'd not be subject to an underpayment penalty.

As far as what you can do at this point - maybe having missed the first 3 estimated tax deadlines - is to do a quick estimate of how much taxes you'll owe based on your 2014 income.  If you see that you'll owe underpayment penalties then send in as much of that tax liability as soon as you can.  You might still owe a penalty for "past due" quarters, (the penalty is calculated on a quarter by quarter basis), but a payment will at least mitigate or stop the clock on any further penalties.


Tom Young



View solution in original post

6 Replies
TomYoung
Level 13

I haven't paid any taxes all year and I'm self-employed. I thought I could pay at the end of the year... How much will I be penalized and what should I do at this point?

The possible issue you face when you prepare your income tax return is being "underpaid."   That's a piece of jargon that has a specific meaning under the income tax laws.

The US income tax system is a "pay as you go" system, and most people "pay as they go" by having income taxes withheld from their paychecks.  For people with significant amounts of income NOT subject to withholding there's an alternative way of paying taxes.  Namely, you pay "estimated taxes" on a roughly quarterly basis, sending in checks to the IRS on 4/15, 6/15, 9/15 and 1/15 of the following year, accompanied by a "voucher" called Form 1040-ES.

If you are self-employed you owe income taxes on your net self-employment income, (amounts collected from clients minus expenses associated with that income), PLUS you owe self employment taxes, (Social Security and Medicare), on that income at roughly a 15% rate.  

Simply because you have to send in a large check when you mail off your income tax return does not, in and of itself, mean you are "underpaid" and subject to underpayment penalties.

Most taxpayers will avoid being underpaid if they:

1) owe less than $1,000 in tax after subtracting their taxes WITHHELD and available tax credits,

OR

2) if they paid at least the lesser of
       a) 90% of the tax for the current year, or
       b) 100% of the tax shown on the return for the prior year.  (If last year's return shows AGI over $150K (for married filing jointly) then change that "100%" figure to "110%.)

So, for example, if in 2013 you had little income and accordingly had just a small income tax liability, then paying that same amount in 2014 via quarterly estimated taxes would put you in that 2)b)  "safe harbor" and no matter how large a check you paid with your 2014 income tax return, you'd not be subject to an underpayment penalty.

As far as what you can do at this point - maybe having missed the first 3 estimated tax deadlines - is to do a quick estimate of how much taxes you'll owe based on your 2014 income.  If you see that you'll owe underpayment penalties then send in as much of that tax liability as soon as you can.  You might still owe a penalty for "past due" quarters, (the penalty is calculated on a quarter by quarter basis), but a payment will at least mitigate or stop the clock on any further penalties.


Tom Young



View solution in original post

rflem04
New Member

I haven't paid any taxes all year and I'm self-employed. I thought I could pay at the end of the year... How much will I be penalized and what should I do at this point?

Thanks Tom very useful information.
FPD2010
New Member

I haven't paid any taxes all year and I'm self-employed. I thought I could pay at the end of the year... How much will I be penalized and what should I do at this point?

Tom, I also ventured into Sole Proprietor business this year, after having run an S-Corp. before it took a while to figure out the differences. I started mid year, made two estimated tax deposits for 2014, including one just made prior to Jan. 15, 2015. What I can't find in these forums is should I use the CASH Method if I'm wanting to still include the estimated taxes done for Q4 in Jan. 2015 in 2014 Tax Return, or should I use Accrual Method? Thanks, M Cook
TomYoung
Level 13

I haven't paid any taxes all year and I'm self-employed. I thought I could pay at the end of the year... How much will I be penalized and what should I do at this point?

It doesn't make any difference which method of accounting you use for your business.  An estimated tax payment made in January, 2015 for tax year 2014 is credited to the 2014 income tax return.
FPD2010
New Member

I haven't paid any taxes all year and I'm self-employed. I thought I could pay at the end of the year... How much will I be penalized and what should I do at this point?

Thank you, that makes sense as you state on the ES form which year to apply tax to. M Cook
gk630
New Member

I haven't paid any taxes all year and I'm self-employed. I thought I could pay at the end of the year... How much will I be penalized and what should I do at this point?

Please need advice and help with similar situation!! Worked for cash (casual jobs) and didn't know that the estimated income and taxes had to be paid all year long! I thought I would be able to pay and file everything for last year before April 15 this new year. What should I do and where to start. Please I need a comprehensive explanation or a guidance from a professional. Thank you in advance
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