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Need to Pay Estimated Income Taxes?

The IRS requires taxpayers to pay their income tax liability as their income is earned. States that charge income tax and the District of Columbia have similar rules. Employers withhold and remit income taxes to cover their employees’ tax liability on wages and other compensation. Job done. But taxpayers with non-compensation income like interest, dividends, capital gains, prizes and awards may have to make estimated tax payments to cover the related income tax liability.

Taxpayers with profits from self-employment must regularly assess their need to make estimated income tax payments, as well as other taxes such as the self-employment tax. “Regularly” means at least quarterly. All the necessary details about making payments, when and how much are at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

It’s a lot to read, so let’s boil it down to three important things to know:

  1. When are Estimated Taxes Due?

For estimated tax purposes, the year is divided into four quarters. Although some payment due dates changed temporarily due to COVID, estimated tax payments are generally due on April 15, June 15, September 15, and January 15 of the following year. If the payment due date falls on a Saturday, a Sunday, or a legal holiday, the payment is due the next business day.

  1. How Much Do You Need to Pay?

Estimated tax payments are based on estimated income and resulting tax liability. An estimated tax payment is due if the liability is at least $1,000, after subtracting withholding and refundable credits. Withholdings or estimated payments must equal or exceed the smaller of 90% of your 2021 tax liability, or 100% of your 2020 tax liability. Calculate your 2021 tax liability at this link https://www.irs.gov/forms-pubs/about-form-1040-es

  1. What if You Don’t Pay Enough?

Interest is due on any unpaid balance, accrued daily from the time the tax liability was created (i.e., by receiving income) until the tax is paid. Interest accrues daily, which can really add to your tax bill. Clearly, the IRS is serious about getting paid on time. Figure your 2021 federal income tax bill by using the IRS Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator.

Taxpayers who paid a lot when filing their 2020 income tax return and those who receive income with no tax withholdings should look at whether 2021 estimated income tax payments are needed. The IRS has all the tools to figure it out at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

Projecting Your Cash Flow

You’ve heard the adage “Cash is King”. Whoever came up with that sure was right; your business can’t run without enough cash to keep it going. So, how do you assess the amount of cash you have compared to what’s “enough”? You can look at your bank balance, but that won’t tell you how much cash you will have next week, next month, or at the end of the year.

Projecting your cash flow is the only way to get the information you need to figure out if you have enough cash to get your business through the week, month, and year. Standard financial reports that businesses generally produce – a Profit and Loss Statement (P&L) and a Balance Sheet – don’t answer questions about your future cash situation. But the P&L and balance sheet can be used as the starting point to project your cash flow.

How do you project cash flow to get a realistic view of your business’s ability to pay the bills? 

Here are four tips to project cash flow:
  1. Start with What You Know

Revenue and expenses related to a contract, lease, or other agreement are a good place to start because those payments are defined. Examples are wages and rent. Be sure that you consider the timing of each item. For example, if you pay wages every two weeks, some months will include three pay periods instead of two.

  1. Look at Your History

Last year’s financial details are a gold mine for projecting cash flow where revenue and expenses vary from month to month. Look at the months or quarters when income was historically received, and expenses were paid. Also determine how many days it takes, on average, for customers to pay your invoices and build that time into your projections. 

  1. Document Assumptions

For income and expenses where you have no history or documents for guidance, you will have to estimate the amounts based on your assumptions. Be sure to document your assumptions to preserve them. Chances are that you will need to revisit and update your assumptions as you learn more, and circumstances change.

  1. Start Small and Build

Projecting an entire year of cash flow may be too daunting to start with. Start by projecting your cash flow for three months. Once you get comfortable with three-month projections, expand to six months, eventually working up to a year. Once you get accustomed to projecting your cash flow, the process will get easier.

Projecting cash flow gets you the information needed to assess if you have enough cash to get your business through the next week, month, and year. Follow these four tips to get a realistic view of your business’s ability to pay the bills. If you don’t, that Cash King could become a Penniless Pauper.

Summer School for Tax Preparers

In the last few weeks of summer, many taxpayers are headed to the beach. But for nearly 11,000 tax preparers across the country, it’s time for Summer School, also known as the annual IRS Tax Forum. The IRS provides the Tax Forum every summer to help tax professionals keep up with tax law updates and issues that affect their clients.

Why does this matter to you? Taxpayers need to keep up with the income tax changes on their own or hire a tax preparer who does it on their clients’ behalf. Taxpayers are responsible for all the information on their income tax return, no matter who prepared it. Hiring a tax preparer who keeps up is essential, especially in years when there are multiple tax law changes (like now).

Feel confident that your tax return is prepared by a qualified tax preparer who keeps up with all the tax law changes by following these five tips:

  1. Ask about professional credentials, such as a Certified Public Accountant (CPA) or an Enrolled Agent (EA). Credentialed return preparers are required to fulfill annual continuing education. The IRS maintains a Directory of Federal Return Preparers with their credentials and qualifications at https://irs.treasury.gov/rpo/rpo.jsf.
  2. Verify that the preparer has a Preparer Tax Identification Number (PTIN) and enters it on your return that is electronically filed with the IRS. Tax preparers who charge a fee are required to have a PTIN and to file returns electronically or submit a reason for paper filing with the return.
  3. Inquire about the tax preparer’s education and training, and how she or he keeps up with tax law changes and IRS processes. Tax pros who are not a CPA or EA should still get annual tax updates to keep up their knowledge. 
  4. Ask about service fees and get a cost estimate in writing. Steer clear of tax preparers who base fees on a percentage of the refund, or who want their fee paid by direct deposit from your refund. These are both unethical practices prohibited by IRS regulations.
  5. Make sure the tax preparer is available all year, after tax season is over, in case you need her or him. For example, notices can come from tax agencies any time of the year. Tax projections sometimes need refreshing before estimated tax payments are due again. 

Getting dependable tax services starts with selecting a qualified tax preparer who keeps up with tax law changes and issues. Whether that person went to Summer School for Tax Preparers or not, following the five tips above will help you to get qualified tax help. 

Need more? The IRS has it for you at https://www.irs.gov/tax-professionals/choosing-a-tax-professional.

Protect Your IRS Tax Identity

It’s not big news that scams, frauds, and identity theft are on the rise. New, pandemic-inspired scams related to Economic Impact Payments (EIPs) and Paycheck Protection Program (PPP) funds have started, while income tax filings and financial information remain big, juicy targets for criminals. 

Scrabble tiles spelling "who are you" in a square.

The IRS has responded by expanding its Identity Protection Program to any taxpayer who can verify her or his identity, instead of being limited to taxpayers who report an identity theft issue. The IRS and the tax preparer community want to inform taxpayers about the Identity Protection PIN Opt-In Program to protect against tax-related identity theft when filing a federal income tax return.

Six things to know about the Identity Protection PIN Opt-In Program (IP PIN):

  1. The IP PIN is a six-digit code known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayers’ personally identifiable information.
  1. To obtain an IP PIN, the best option is Get an IP PIN, the IRS online tool. Taxpayers must validate their identities to access the tool and their IP PIN. Before attempting the process, see Secure Access: How to Register for Certain Online Self-Help Tools
  1. Once issued by the IRS, the taxpayer’s tax account is locked, and the IP PIN serves as the key to opening that account. Electronically-filed federal income tax returns that do not contain the correct IP PIN will be rejected and a paper return must be filed.
  1. An IP PIN is valid for one specific calendar year. A new IP PIN must be obtained for each filing season.
  1. Current tax-related identity theft victims who have been receiving IP PINs via mail will continue to receive an annual IP PIN to file her or his federal income tax return.
  1. There is no opt-out option. The IRS is working on it for 2022. Taxpayers who cannot provide an IP PIN or obtain a replacement can’t unlock her or his tax account and must file the return in paper form. Any refund will take several weeks to process.

The IRS IP-PIN Program is an option for taxpayers to protect her or his identity from theft and fraudulent tax filings. For taxpayers that want to use the program, the IRS offers more information and instructions at this link – https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin.

Seven Years and Going Strong

A few days ago, I suddenly realized that it’s been seven years since I quit my corporate J.O.B. and started my business. Wow, seven years and going strong! With diligence and good luck, I’ve achieved my business and personal goals. Plus, I’ve had some fun along the way. The fun is probably why the time has flown by so quickly.

Milestones are worth celebrating – albeit briefly – and are the perfect time for reflection. It’s also important to periodically step back to assess your progress, identify areas of potential improvement, and update your goals. Businesses that survive long enough to celebrate many milestones are the same ones that invest some time and effort in these four activities:

  • Plan to Meet Defined Objectives

A business plan is a road map to get where you want to go and help to keep your “Eye on The Prize”. Unless you know what you’re reaching for, you can’t grab it. Set your overall objectives and describe the detailed steps to achieve them. Set interim milestones along the way to help measure your progress and keep you motivated.

  • Execute Your Plan

Actively work through the detailed steps in your plan. It’s exhilarating to achieve goals and move forward. Executing your plan also gives you opportunities to get more information. Use new information to adapt your plan and make course corrections. Also listen to how your network receives your message and adjust the wording to get your message across better.

  • Outsource Needs You Can’t (or Shouldn’t) Meet

Be realistic about aspects of your business where you do not have the necessary expertise or can’t take the time away from your core business to do yourself. Legal, accounting, and social media are some areas where engaging an expert can accomplish specialized tasks, free up your time, and prevent you from making costly mistakes.

  • Give Back

Answering general questions in your area of expertise and presenting at workshops are ways that you can share knowledge with your network and establish your credibility. Sharing tips and perspective helps to create your brand and draw people to you and your business. Being generous is often its own reward, over the long run.

The last seven years of having my own business have been hard work, fun, and rewarding – all at the same time. It takes a lot more than investing in the four activities described above to be successful. But businesses that invest in planning, executing, outsourcing, and giving back have an opportunity to achieve seven years in business and keep going strong.

Tax Balance Payment Options

Believe it or not, the IRS is still opening mail and processing tax returns that stacked up during the COVID-19 pandemic. Another IRS task that backed up over the last year is sending notices to taxpayers who have outstanding tax balances. If an IRS notice arrives in your mailbox, don’t panic. Open it right away, read it carefully, and verify the contents with your tax records. 

Even if the notice is due to an IRS mistake, you need to respond to get your tax records corrected. But what if the notice is accurate and you do owe taxes to the IRS? How can you pay?

The IRS offers several payment options, depending on your situation:

  1. Pay Now – Paying the full balance online is free if you can have the balance due debited from the bank account of your choice. Paying by credit card is an option but the fees are high, so make sure that you read the fine print first before making your decision. https://www.irs.gov/payments/online-payment-agreement-application
  1. Short Term Payment Plan – If you can pay the amount due in 120 days or less and the total amount due is less than $100,000, this could be the best option for you. No set-up fee is charged, and you can pay via direct debit from the bank account of your choice. https://www.irs.gov/payments/online-payment-agreement-application 
  1. Installment Agreement – If you need more than 120 days to pay, this option requires a set-up fee of between $31 and $225. Installment Agreements may require some financial information from you, depending on the amount due. https://www.irs.gov/payments/payment-plans-installment-agreements#costs
  1. Offer in Compromise – The IRS wants to collect all taxes due but does not want to create a financial burden on taxpayers. An Offer in Compromise allows you to settle your tax debt for less than the full amount owed if paying your full tax liability would create a financial hardship. See if you qualify at https://www.irs.gov/payments/offer-in-compromise.
Other considerations to keep in mind are:
  • Payment plan applications are generally easier to get approved for lower tax liabilities due than for large balances. 
  • The application process differs based on the tax liability outstanding. For example, applications for $10,000 or less are automatically approved as a guaranteed Installment Agreement. Amounts over $50,000 require a more thorough review to determine if assets can be liquidated to pay the taxes due.

The IRS has been catching up with its pandemic backlog, including sending out notices to taxpayers who have outstanding tax balances. If an IRS notice arrives in your mailbox, check it against your records. Really owe what it says? Remember that the IRS offers several payment options, depending on your situation.

Tax Assistance Without the Wait

If you’ve ever called the IRS with a tax question, you know how challenging it can be. A recent report from the Taxpayer Advocate, an independent entity within the IRS, indicates that those challenges are not going to get better any time soon. Tax return processing delays and taxpayer call answer rates have gone from pretty darned bad in the pre-pandemic years to absolutely abominable now. 

For example, at the end of the 2021 tax filing season, the IRS had a backlog of about 35 million tax returns. Pre-pandemic, at the close of the 2019 tax filing season, the IRS had a backlog of 7.4 million returns awaiting manual review. And trying to call the IRS is ridiculous! During the 2021 filing season, only nine percent of the 167 million calls received by the IRS were answered, but only after waiting on hold for an average of 20 minutes.

To help taxpayers get information without the wait, the IRS has updated its website and added features for taxpayers to get answers to general tax questions and to access taxpayer information. These three updates make it quicker and easier to get answers to your tax questions:

  1. The home page of the IRS website, www.irs.gov, has links to most of the information that taxpayers are looking for, from checking the status of your refund to learning about the latest Stimulus Payment. You can easily file your federal taxes for free, access forms and instructions, and find answers to your tax questions.
  1. The entire IRS website is available in multiple languages – Spanish, simplified and traditional Mandarin Chinese, Korean, Vietnamese, Russian, and Haitian Creole. Just navigate to www.irs.gov and use the drop-down at the top of the screen to adjust to your desired language.
  1. The IRS Online Account is an online portal that allows individual taxpayers to access their tax account information, including tax balances and payment history; set up payment plans for outstanding balances; and get copies of their tax transcripts. Access the portal and initiate your account at IRS.gov/View Your Account Information.

The IRS is working hard to make it easier for taxpayers to get answers to general tax questions, as well as for specific information about their tax balances and payments. Getting information online is common these days, so it makes sense for the IRS to take advantage of the opportunity to shift some of what would be telephone inquiries to the web. 

So, the next time you have a tax question, you don’t have to wait on hold. Just go to www.irs.gov and get your questions answered more quickly than your call would be answered by an IRS representative.

IRS “Dirty Dozen” Top Tax Scams for 2021

In late June, the IRS announced its Dirty Dozen Top Tax Scams for 2021. Unfortunately, the top scams don’t change much from year to year. That’s why the IRS works hard annually to communicate the different illegal schemes perpetrated by scammers against millions of people. 

This year, the IRS began its “Dirty Dozen” list for 2021 with a warning to tax professionals, taxpayers, and financial institutions to be on the lookout for scams that fall into four categories:

  1. Pandemic-related scams
  • EIP or Refund Theft: Refund fraud and theft remain an ongoing threat. Criminals this year also turned their attention to stealing Economic Impact Payments (EIP) provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 
  • Unemployment Fraud: Taxpayers who lost their jobs because of the pandemic were eligible to receive unemployment benefits. Unclaimed unemployment benefits claimed by scammers using stolen personal information is reported as taxable income to the taxpayer, not the scammer.
  1. Personal information cons
  • Phishing: Don’t click on links claiming to be from the IRS because it could be a fake email looking to steal personal information. Be wary of any emails with embedded links − they may be nothing more than scams to steal confidential financial information.
  • Ransomware: Ransomware is malware that infects a victim’s computer, network or server and looks for and locks critical or sensitive data with its own encryption. In some cases, entire computer networks can be adversely impacted until the ransom is paid.
  1. Ruses focusing on unsuspecting victims 
  • Senior Fraud: Seniors are more likely to be targeted by scammers than other people. They are also becoming more comfortable with evolving technologies, such as social media. Unfortunately, that gives scammers another means of taking advantage.
  • Threatening Impersonator Phone Calls: A common scam is a bogus threatening phone call from a criminal claiming to be with the IRS. The scammer attempts to instill fear and urgency in the potential victim.
  1. Schemes that persuade taxpayers into unscrupulous actions 
  • Unscrupulous Return Preparers: Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season. They commit fraud, harming innocent taxpayers, or talk taxpayers into doing illegal things, like inflating deductions.
  • Offer in Compromise Mills: Misleading tax debt resolution companies can exaggerate the chance to settle tax debts for “pennies on the dollar” through an Offer in Compromise (OIC) for a hefty fee. Turns out, an OIC is only available to a small number of qualified taxpayers.

Don’t get caught by one of the IRS “Dirty Dozen” top tax scams. Read about how to protect yourself here –  https://www.irs.gov/newsroom/irs-wraps-up-its-2021-dirty-dozen-scams-list-with-warning-about-promoted-abusive-arrangements.