307 - Why I owed $10,000 to the IRS this Year
On today's episode of the podcast I'm getting real personal and sharing why even a tax attorney ended up owing money to the IRS. We're oversharing today.
If you're just getting started in your business or are looking for help with the tax basics, we have a $30 mini course called The Tax Toolbox (notavglaw.com/toolbox). You can get it by end-of-day Friday for 50% off, making it just $15, using code 50OFFTOOLBOX at checkout or clicking here.
We have a lot of folks come into my programs and book one-on-one services who have tax issues with the IRS. Sometimes they're serious, like I've neglected taxes for years and owe $100,000 (this is more of a common scenario than you may think), and sometimes they're I forgot to report one 1099 and now I owe a few hundred dollars, and some are in the middle, like mine.
I always hear business owners put themselves on the back burner because they're too focused on client projects. Like the web designer who needs to update their own website. I'm guilty of this myself when it comes to tax things for my business. Last year, I did not make any quarterly tax payments 😱 *insert collective gasp* but don't go thinking you can do the same.
The difference is, I am on payroll, I have an S Corporation like many of our clients and students to (though I would say it's the minority). That means that most of my taxes are taken care of for me because I pay myself through payroll twice of month and a big chunk is withheld for taxes so I only really need to make payments on any additional income in the business. I talk about that additional income in my profit reports. If you've listened to the reports, it's the profit beyond owner's salary which is what I need to pay taxes.. I expect I need to pay about 10% of that profit amount.
In 2022, that profit amount was $36,000 on top of what I paid myself. I rounded up to $4,000 as my estimate of what I would owe and I had that amount saved when my husband and I went to file our taxes. But I was still technically behind because I hadn't been paying quarterly taxes this year, which is what I call getting into the "oh shit cycle" of back taxes.
I'm not behind behind, like I'm not on a payment plan, but this is why I tell people to take their taxes seriously from the beginning of their business, otherwise you're always saving up to pay your back taxes and find yourself getting behind.
What I did not account for in my savings, was an additional $20,000 payment my husband got through 1099 and we did not make payments on that so when we went to file it came to about $10,000 and what that meant for us is that we had to put some of our improvement projects on hold because we cut into those savings.
A lot of folks would not be able to pay a $10,000 tax bill. Had we not been able to pay ours, what would have happened is we would have set up a payment plan, and the IRS makes those relatively easy. If you owe less than $10,000 in taxes and you haven't had to get on a payment plan before, you can get what's called a guaranteed agreement, which is a fancy way of saying you can go to the IRS website and request a payment plan and it's pretty much guaranteed you'll be approved.
If you owe more than $10,000 in taxes or have had a payment plan before, you can still request an installment agreement and you'll probably be fine unless you owe a lot of money or this is a chronic problem and you have more serious tax issues, like fraud.
When it comes to generating how much you should pay, inside my program Unf*ck Your Biz and in my book, I recommend one of two methods. One, the quick method is to pay it down as fast as you can and then two, the slow and stead method. I recommend the quick method if you can pay it quickly over the next few months and still save for this year's quarterly taxes. If you don't have enough discretionary income for this, the main thing I like people to focus on is getting off this oh shit cycle which requires prioritizing savings for this year's taxes. Save everything you need to save for your quarterly taxes and then look at what's leftover for your discretionary spending and then you're going to base your installment agreement off of that. It's better than overcommitting yourself. Interest to the IRS is typically lower than the credit card interest on debt you may rack up if you blow through all your money paying the IRS off. You can learn more at notavglaw.com/back-tax-strategy. You can also learn more by getting our free Back Tax Strategy Guide notavglaw.com/backtaxstrategyguide
What I did to avoid the installment agreement was I ended up increasing my tax withholdings from my paycheck when I pay myself every other week. For context, I already had 0 on my W4 which is the form you fill out when you get a job that has taxes withheld and 0 is when you have the most amount of taxes withheld so I already had the most withheld so I was taking out $1,200/month. So I decided instead of manually setting aside more money, I was able to do an override on my withholding which you should be able to do in any payroll system so now 30% of all money is withheld so now I'm automatically paying $2,500/month towards taxes which is a lot. I still will probably have to pay some money on my profit but this will already cover a lot of it.
If you're not an S Corp, you can do the catch-up strategy that I mentioned before plus you're going to need to increase your quarterly tax payments most likely if you ended up owing last year. You'll need to end up making a new estimate. Some accountants will do what I'm doing for their clients, I talk to folks all the time who say they take a salary but don't end up getting any money because it all goes to taxes. The more profit you make proportional to your salary, the higher the withholding percentage is going to need to be. Let's say you make a salary of $50,000 and have an additional profit of $100,000 the taxes you're paying on your salary are not going to cover that distribution. It's different for everyone's business, you can't just save 20% because someone told you to save 20%.
This is why I go through this in such great detail, I want people to be empowered to know how your quarterly taxes get impacted if your spouse gets a bonus or if you get a raise, it's all a collective, holistic approach. You need to have enough information for yourself so that you can make quick pivots if nothing else so that you can ask your tax professional when they do pop up.
Resources from this episode:
- Tax Toolbox - notavglaw.com/toolbox
- Back Tax Blog Post - notavglaw.com/back-tax-strategy.
- Back Tax Strategy Guide - notavglaw.com/backtaxstrategyguide