Extension time: Your Apr 15 responsibilities as a taxpayer
Many of our customers file their taxes by Apr 15. Many file an extension and finish their taxes by the extended deadline on Oct 15, six months later, too. There is no “right” way to do it.
What is required is that the IRS be kept up to date on your intentions by Apr 15. If you miss one of these two IRS requirements, you’ll almost certainly get an IRS letter in the mail.
Failure to File: The simpler one
If you miss the tax filing deadline and haven’t requested an extension, the IRS will assess a Failure to File penalty.
How to Avoid It
• Just file for an extension before the April deadline! This is included with Wellness Fi’s tax services. Many business customers have very good reasons to file for an extension, such as late forms from partners, late forms from investments, or more just time to gather their records. These are automatically granted, no reason needed. There’s even annual speculation that filing an extension lowers your risk of audit. While the IRS doesn’t affirm this, it does say that we get one more IRS review when we file a corrected return. If things aren’t quite ready, don’t rush.
• Even if you can’t pay, file the return or extension to avoid this penalty.
IRS detail.
Failure to Pay: The one to watch
If you file your return or an extension but don’t pay the taxes owed, the IRS charges a Failure to Pay penalty of 0.5% per month of the unpaid amount. This can be much lower than the Failure to File penalty if you’ve stayed up to date on estimated taxes. If you’ve paid very few taxes in the last year, the accrued interest can be eyebrow-raising.
If you’ve paid truly zero income taxes in any form, this is most painful. This most often happens when a busy new business owner forgets to keep up with tax payments, or is intimidated by them. Don’t let that be you! If you need help keeping up with what to pay, and you’re a psychology or therapy business owner, reach out to us. We can help you keep on top of this.
W-2 income: If your household has a W-2, taxes are often withheld from pay automatically with each paycheck. For those of us with a mix of W-2 and business income, remember that all of the taxes go into the same bucket for payment, and they still all need to be paid. If 2/3 of your income comes from a W-2, and 1/3 from your small business, 2/3 of your taxes are likely paid for you in your paycheck and 1/3 still need to be paid in estimated taxes.
Your tax preparer can help you estimate these taxes, but we can’t pay them on your behalf.
How to Avoid It
• Pay as much as you can throughout the tax year. For instance: Most business owners owe estimated taxes 4 times a year in 2024 for 2024 taxes. Top up by the Apr 15 deadline, if needed, to reduce penalties and interest.
• Set up an IRS payment plan if you can’t pay in full.
IRS detail.
Filing an Extension but Unsure How Much to Pay?
A tax extension only gives you more time to file, not more time to pay. If you’re unsure how much to pay:
1. Estimate based on last year’s return – If your business income, living situation and tax posture have been relatively stable in the last year, this works well. If not, a simple estimate will get you in a pretty healthy spot. If your business profits have grown by about 5% in the last year, assuming 5% more in taxes on Apr 15 is a safe bet. If you’re off by a small amount, any interest due or refund will be small, too.
2. Overpay rather than underpay – If you overpay, you’ll get a refund. If you underpay by too much, you could owe penalties and interest. It’s common to not want to do this when cash is tighter. See rule (1): estimating based on last year’s return is a great way to go. If you’re doing a lot of first-time tax optimization, such as filing an S-corp return for your business, this is a good time to err on the higher side and keep things simple.
State Taxes
State taxes often follow the same basic thought processes as the IRS. The specifics are obviously can vary, but the
Bottom Line
If you can’t file on time, always request an extension to avoid the Failure to File penalty. If you can’t pay in full, pay what you can. Being proactive can save you money and the stress of getting IRS notifications in the mail.
Exhale. The letters we see with big dollar amounts have to do with really clear underpayment of taxes in the previous tax year. If you’re paying all or most of your estimated taxes and at least attempting to top up (if needed) on Apr 15, you’ll be fine.
Read on if you own an S-corp or partnership interest
If you own an S-corp or partnership, you also have responsibilities on March 15. Find out more about those here.
