Save That Tax Money Fast
Adam's wife started a speech therapy business last year and netted $60,000. They underpaid their taxes by $8,000. Does Dave recommend getting that money from their 401(k) to pay?
QUESTION: Adam in Mississippi has a wife who started a speech therapy small business last year and netted $60,000. They think they underpaid their taxes by $8,000 and wonder if Dave recommends getting that money from their 401(k) to pay that. Dave has a better idea.
ANSWER: I would delay filing until the last possible minute, April 15, and in the meantime pile up as much of the $8,000 as you can and send it with your tax return when you file it. Then put the balance on an installment agreement when they contact you, and they’ll contact you probably in 30 to 60 days.
But the trick is this: Before they even contact you, or before April 15, try to knock that debt out. Sell stuff, have a garage sale, live on beans and rice, pull every dollar you can out of the business to try to pay them, because you do not want to be in debt to them. But make sure you do file your income taxes. Everything is on hold with Dave’s plan until you get this mess cleaned up.
As soon as you file, give them every dime you can scrape together. Every dollar you don’t pay is going to be penalized upon filing. But from the time you file until the time they ask you for payments, I’d like you to pay it off before they ever call you. Filing an extension doesn’t help, because you can’t extend the fact that you owe the money. All you can extend is your actual paperwork. You owe the money, and you’ll be penalized for it anyway whether you extend or not.
To fix it going forward, every dime that is profit every month you close your books, you set aside a fourth of that to do your quarterly estimates accurately in 2011. You can’t base your tax bill only off of what you did last year. What happened is your tax preparer told you what the minimum was you had to pay, which was accurate to avoid a penalty, but that failed to plan for the cash problem that resulted.