It is important at the end of the year to start thinking about next year’s tax situation.  While it is likely too late in the year to fix any issues you had in 2018 with your withholding or estimated tax payments; but it is never too early to get your situation fixed going into 2019. 

Analyze Your Situation 

If you are expecting similar income in 2019 compared to what you have earned in 2018 then you have a good starting point in determining what you need to do with your 2019 tax payments. Going online to a withholding calculator, like the one the Internal Revenue Service offers, right now can show you what type of refund or balance you can expect for your 2018 tax return. Usually, it is not as in depth as going to accountant to get your taxes prepared; but, it can give you a good estimate as to what you are looking for. 

Dealing With Refunds

If you are showing a major refund that is good news.  There are two ways to go with this information for 2019.  You can either keep things as they are and likely get another refund in 2020 for your 2019 tax year.  You could also change your withholding to lower what your refund would be; but, you would see the money in your paycheck every pay period. Just make sure to be careful you are not expecting a change to your 2019 taxes, such as no longer being able to claim a child or decrease in mortgage interest from selling a home (and not purchasing a new one).

A lot of people love getting all that money back in the spring time.  Some use it as a vacation fund that they cannot touch (because the money stays with the government until you file your return).  Others use their refund to pay off those holiday season credit card bills.  Still others use their refunds as a way to get that big-ticket purchase that they have been putting off. 

Others will look at getting a huge refund and think, why should the government get to hold my money during the year?  They can use a withholding calculator to determine the minimum that they would have to pay in during the year to maximize how much they take home every pay period.   Most calculators will advise you to withhold at a level that keeps your withholding at the point where you either get a $100.00 refund or will owe $100.00. 

People can use that extra money each pay period to catch upon bills throughout the year, start saving for a vacation, or starting a retirement account.  One reason why putting the money into a long term investment is a good idea is that it can help with lower your total taxable liability for that year.  It can also get rid of the temptation to dive into that fund for random things through the year.  This goes back to people who don’t mind having the government hold onto the over withholding, it serves has a no interest savings account that they cannot access.  In order to get that savings account back you must file your return.  You are only entitled to the three most recent years of refunds, if you do not file on time. 

Handling Tax Liabilities

On the other side, are those who have not been withholding enough taxes throughout the year.  Those individuals need to make the proper corrections so that they do not continue to owe taxes year after year.  The biggest issue most people have once they owe for one year is that they do not take the necessary steps to correct the underlining issue and the taxes owed for previous years can snowball on them to the point they do not know what to do. 

If you are expecting to owe for 2018, first thing to do is to figure out the issue that is causing you to owe. One common problem is under-withholding from your wages is causing the problem. If this is the issue, then provide an updated W4 form to your employer as soon as possible so that your withholding can be in the proper place at the start of the new year. Another one of the most common problems we see are self-employed individuals that did not make enough estimated tax payments for 2018. If this applies to you, then you need to start preparing for 2019 taxes now. 

Self-Employed Individuals or Business Owners

The first step would be to develop a business budget tracker.  Most self-employed individuals just do not keep good records of what is a business expense and what is a personal expense.  Keep these records can help determine what your actual net income is. Your net income is the key factor in determining what your tax liability is. If you keep a solid spreadsheet of your gross income minus business expenses you can then figure out how much of your net income should be set aside to make quarterly estimated tax payments. 

The IRS requires that if you owe more than $1,000.00 in self-employment tax for one year, the next year you are required to make estimated tax payments.  If you do not make those payments during the year, when you go file your return, and there is another balance, you may have additional penalties for not pre-paying your tax. 

We try to advise self-employed clients to look very closely at their business and personal budgets to figure out where they can make up the difference to pay their taxes going forward. For many, it’s a lot of tough decisions on their personal side. You often have to make the conscientious effort to set aside the potential tax payment every month or quarter.  For others, they realize that being self-employed is too much of a hassle and go find work as a wage earner.  It is possible to be self-employed, make good money, and be responsible with your tax obligation.  It isn’t the easiest thing, but it can be done.

Arthur Rosatti, Esq. is a licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies.  If you have concerns about your tax liabilities, making estimated tax payments, or correcting your withholding, schedule an appointment with our office.

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