As a contract employee, you run a high risk of owing a large tax bill come April if you are not proactive about it. If you make above a certain income, you are required to make quarterly estimated tax payments, which can help reduce the balloon payment you have to make every April. Even if you do pay estimated payments, you may find yourself not knowing how to pay your 2015 tax bill. By starting your calculations early, you can be sure to get the funds by April so that you do not end up increasing the bill with late payment and late filing penalties and interest.
Make Sure You Have All Your Forms
Before you can complete your tax return, it is important that you have all your accurate income forms. If you work for several clients, then you will most likely have several 1099 forms. It is possible that not every client will get you a 1099, so you may have to estimate your income from some sources. You still need to record income you receive, even if you do not get a 1099 from the client. You also need your other forms for income and credits, such as interest income, other sources of income, paid student loan interest, premium tax credit, and more.
Did You Calculate Your Premium Tax Credit?
If you get your health insurance through the exchange, then you need to wait to complete your tax return until you receive the form for the premium tax credit. It many situations, inputting this information can save hundreds of dollars on your tax bill.
Check the Latest Tax Laws for New Deductions/Credits
Every year, there are amendments to the tax law that could mean you have an additional deduction or credits you can use to help reduce your tax liability. Alternatively, some credits and/or deductions you have used in the past may no longer apply, or they may have different regulations about which you need to be aware. It is to your benefit to make sure you are using the most up to date information when compiling your tax return, as this could end up saving you money.
Look to the Professionals
It may be to your benefit to talk with a tax professional. Calculating your annual income tax as a contract employee, freelancer, or self-employed individual can be very complex. A professional not only knows how to compile everything, but they can also help you to calculate deductions and credits to help you reduce your tax bill. It is best if you start with a complimentary meeting to see if their services can actually help you. Many tax professionals charge a significant fee, so it is only worth it if it saves you money.
File Your Return on Time
Even if you cannot pay your tax bill, it is essential you still file your tax return on April 15 or ask for an extension to October. If you can pay any part of your bill, you should do so. The day after taxes are due, you will be charged penalty fees and interest. The penalties for not filing are much higher than not paying. If you at least pay a portion of your tax, then any interest or penalties will be lower. If you do file an extension for filing your return, it is still important that you pay what you can on your tax bill. A tax extension does not mean you get an extension on paying your taxes, so any penalty fees and interest still begin the day after tax day, unless you file for a special extension on paying. However, this is only granted in special circumstances, which are typically not that you cannot afford to pay.
How Much Can You Pay?
Before you give up on paying your large tax bill, consider how much you can pay. You may not be able to pay the entire bill, but it is possible you have some of the capital to pay a portion. You may also consider selling some assets to pay the bill. This is not always the best answer, but if there is something you no longer need that can fetch you money, it may be the best solution. If you calculate your bill early enough, you can also trim down your budget and/or take on a few extra jobs and set aside the additional money in the months leading up to April so that you have the entire amount when tax day comes.
Find Ways to Get the Funds
If you look at your income flow and assets and know that you cannot find the money to pay your tax bill, then it may be worth it to look for credit from your bank. In many cases, personal loans, credit cards, or other lines of credit from banks will have a much lower interest fee and penalty charges than if you do a payment plan with the IRS. Before signing for a line of credit, it is important to thoroughly understand all the fees, including any late payment fees. You should also only take out a loan that you can actually pay back without finding yourself in financial difficulty. Depending on your situation, you may also be able to get a loan from a friend or family member for no interest or a very low interest to help you pay your bill.
Negotiate with the IRS
Once you have exhausted all other options and are still stuck with a tax bill for which you have no way of paying, even with lines of credit, then you can start looking at ways to negotiate with the IRS. The IRS does offer payment plans, which allow you to pay off your tax bill for a small amount of money every month over a period of time. You are still charged interest and penalty fees, but they are less than if you were to just not pay. You also do not have to worry about any collection action or other negative repercussions. If you already have a payment plan in place, it is possible to renegotiate it to add your latest tax bill. There may be other programs in place that make sense for your situation that can greatly reduce what you pay.
As someone whose income tax is not automatically taken off of their wages, it can be difficult to keep up your tax payments, leading you to a large bill come tax time that you have no way to afford to pay it. By starting early, it is possible to find the ways to reduce the tax bill and/or find funding for it. Once you have completed this year’s taxes, it may be beneficial to hire an accountant or other tax professional to help set you up with a tax schedule for the future so that you do not encounter a similar situation in subsequent years.
If you are still unsure about how to get the funds to pay your tax bill and/or back taxes, then call the tax professionals at Fidelity Tax Relief at 877-372-25520 to discuss your situation. You can also fill out this quick, 30-second questionnaire to see if you qualify for the top federal tax debt relief solutions.