Believe it or not, despite what those commercials on Fox News tell you, you are not going to get out of paying taxes or “greatly reducing” your past tax bill. Also, that tax advice you got from your golf buddy, who got it from his dentist about writing off that vacation to Hawaii was probably not valid tax advice either. There is a ton of misinformation out there when it comes to tax advice. One of the area’s we see in our office is related to Estimated Tax Payments. Here are a few actual cases our office has seen to help guide you through the Estimated Tax process.
Our first case involves a local business owner that was the beneficiary of a large family inheritance. He used the funds from the inheritance to purchase a business. While the business had payroll services for its employees, because it was a single member Limited Liability Corporation the business owner was supposed to be making estimated tax payments on the draws he was taking against the business.
His philosophy when it came to estimated tax payments was that “It is an estimate. How is the Government supposed to know how much money I am going to make?”. Although we tried to explain the concept of “estimated tax payments” to him, he failed to understand this concept and refused to make his payments. Because of his attitude regarding this issue he was constantly paying fines and late fees to the taxing entities that could have been avoided should he have simply made his scheduled payments on time.
Our next case involves the owner of a local construction company. This business owner was used to working with sub-contractors, many on a cash/under the table basis. He also had not paid taxes in years.
Well, all this came back to bite him in a Department of Labor audit when a sub-contractor, or employee depending on who you ask, filed an unemployment claim. The DOL garnished in excess of $90,000.00 in what they estimated to be unpaid taxes related to the business. The State then attempted to garnish another $60,000.00 for unpaid taxes.
We were able to reconstruct the books for this client and file 1099’s for several years to applicable sub-contractors which helped alleviate some of his tax burden. We setup employees on a payroll system. We also setup the business owner with estimated tax payments. We were able to negotiate a significant refund of the $90,000.00 garnished with the DOL and the $60,000.00 garnished by the State.
Our next business owner is one we have featured numerous times. This guy has one, and only one checking account that he runs both his personal and business out of. For years we would encourage him to reclassify his business as an S Corporation and setup payroll for he and his employees.
This business owner owes large sums to the taxing entities each year. For one, he does not like to issue 1099’s to his vendors and sub-contractors. He thinks they are all buddies and he doesn’t want to upset them. He also pulls large sums in draws for travel and meals that are not related to company business. Now, you may say, how do you know it’s not company business. Unfortunately, in this case there is no way anyone could justify these expenses as company business and not expect an audit. As we have explained numerous times over the years, “pigs get fed, hogs get slaughtered”.
Another reason the business owner owed so much tax was a failure to make estimated tax payments. The owner refused to do so because of a commercial he saw on Fox News that told him he did not have to and that he could get out of paying taxes. This is also very untrue as we explained to him. Everyone has a tax burden associated with them simply by living in this Country. Yes, there are strategies you can implement to reduce your tax burden, but there is still tax you are going to be paying.
It took several years but we finally have this business owner setup on payroll so at least taxes on income are being paid. We have encouraged him to watch his cash and draws so that we can make adjustments to income throughout the year. He is setup with a year end tax planning session so that we can review financials and adjust any taxes that may be owed.
Finally, we end with the case of a local realtor. This realtor hates paying taxes just like everyone else. However, she chooses to make her estimated tax payments in one lump sum at the end of each year.
She is of the belief that the government should not prevent her from collecting any interest that the tax funds may be collecting throughout the year. It’s not a bad strategy if you can absorb the significant financial bite at the end of the year. Fortunately, because she is one of the few successful realtors in our area she is able to do so comfortably.
If you are self-employed or running a side business, we would encourage you to setup estimated tax payments. It is a safe way to avoid paying a large sum of tax at the end of the year at a time when you may not have much money in the bank to make a payment.