Finalizing Your Return

Finalizing Your Tax Return

What if You Owe. It is very important to file your tax return by April 15th, or get an automatic extension of time to file. Why? The penalty for failing to file a tax return is 5% per month – per month, not per year! – for every month that you have not filed your taxes. The maximum penalty is 25% of the taxes you owe.

By contrast, the penalty for failing to pay is half of one percent (0.5%) per month of the amount of taxes you owe. The IRS will also charge you interest on the amount of tax you owe.

Owing additional tax at the end of the year isn't fun. But here's how to get a handle on the situation.

File your taxes, or get an extension.

Pay as much as you can by April 15th.

Consider paying your taxes by credit card, or setting up a payment schedule where taxes are automatically withdrawn from your checking account.

If you will not be able to pay off your balance in a few months, ask the IRS for an installment agreement by calling their toll-free number at 800-829-1040. An installment agreement is a monthly payment plan.

To avoid having to owe the IRS next year, you should increase your income tax withholding. Fill out a new Form W-4. Use the worksheet on the Form W-4 to calculate a precise withholding amount.

Third Party Designee. If you want someone else to be able to discuss your tax return with the IRS, fill out the Third Party Designee section of your tax return.

This is helpful if you want your tax preparer to be able to talk to the IRS about any questions or concerns the IRS might have about your tax return. You can also use this area to designate a family member, caregiver, or other trusted person to deal with the IRS on your behalf.

Your 3rd Party Designation will expire one year from the due date of your tax return.

Signing. You are required to sign your tax return. By signing the return, you are declaring under penalty of perjury that your tax return is accurate. You must not cross out, put a line through, or white out the perjury statement just above the signature line. If you do so, the IRS will consider your tax return "frivolous" and assess a $500 civil penalty.

You are required to date your tax return. The date must be the day you actually signed the tax return.

Giving the IRS your occupation and telephone number is optional, but highly suggested.

Paid Preparer's Use Only. If you have paid a tax professional to prepare your return, the preparer must fill out this section of the tax return. He or she must sign and date the return, must write down their Social Security Number or Preparer's Tax ID Number, and provide other information about the tax firm. Do not let your preparer leave this area blank.

If someone is helping you to prepare your tax return, such as a friend, relative, or volunteer, they do not need to fill in this information if they are not being paid to help you.

Assembling Your Return. Staple one copy of each of your W-2 statements to the front of your tax return. If you have other schedules and statements to file, sort them from lowest to highest using their Attachment Sequence Number in the upper right-hand corner of the form. Staple everything together.

Mailing Your ReturnMail your tax return to the right IRS Service Center.

IRS Resources
Addresses for IRS Service Centers

How to Prepare Your Tax Return for Mailing

Pay Your Taxes on the Web

More Tax Filing Resources
File an Extension

IRS Payment Plan

Tax Debt Strategies

Paying Yourself Can Never Be Bad...

One of the biggest fears that millions of taxpayers face during tax season is having to file that dreaded 1099-Misc income on their returns. You work all year independently not having any federal, state, social security or medicare tax deducted, and now it’s time to pay those taxes.

Suddenly in January, you receive that 1099 in the mail and the sweat starts rolling. You furiously start digging for deductions. The IRS considers you to be a sole proprietor or independent contractor and you’ve got to file a Schedule C (Profit and Loss From Business) with your return. Your Tax Preparer enters your information and when you look at the finished return, you find that Line 58 of your 1040 under “Other Taxes” shows an amount for “Self-Employment Tax”. The first question that most of my clients ask is “What is this and why am I having to pay another tax?”. My first response is “Do you have a 401K or retirement plan?”. They suddenly look at me wondering why I’m asking that question and what does this tax have to do with my retirement. That’s when I begin my spill about “why paying yourself can’t be bad”.

When you’re a W-2 wage earner, your employer is responsible for taking out the necessary taxes, but when you work as a 1099 wage earner, you alone are responsible for the payment of these taxes. Federal tax payments can be made quarterly to the IRS, but self-employment taxes can only be paid at the end of the year when you file your return.

Self-employment tax is composed of a Social Security tax of 12.4% and a Medicare tax of 2.9%. For 2006, the maximum amount of wages and/or self-employment income subject to the Social Security part of the self-employment tax is $94,200. All net earnings are subject to the Medicare portion of this tax. Therefore, if your salary income as an employee is $94,200 or above, you would have already paid all the Social Security tax you owe. Your self-employment income would, however, be subject to the Medicare tax of 2.9%. There is no limit on the amount of earnings subject to the Medicare portion of the self-employment tax.

Simply put, they are social security and medicare payments that you make to yourself calculated on the “net” amount of your 1099 income. They are a mandatory tax imposed by the Social Security Administration, which are enforced and collected by the IRS. When collected, the IRS deposits these funds in your name with the Social Security Administration.

When you look at that final 1040 amount, and you realize that you are having to play catch-up on all the federal, state and self-employment taxes that were not paid during the year….yes, I can see where the sweating would begin. But please take some advice, even though you panic and sweat, don’t just go home and toss the return aside and not file. The result of not filing can result in a tax burden that far exceeds that of the original return balance. Failure to file can result in your having to hire a Tax Resolution service such as Effectur, Inc. to assist you in “making peace” with the IRS.

Remember self-employment tax is you paying yourself in the form of income and health care benefits at your retirement. So, “paying yourself can never be bad!”.

Sharon R. Raines, Financial Planner/Tax Preparer