Self-employed Tax Penalties follow a different tax payment process than those employed under a business or a company. As tax is not withheld from their wages, it is their responsibility to file for them throughout the year.
However, the process sometimes leads to tax penalties associated with not knowing how much to pay and when to do so. But is there a way to avoid this issue? Here are some tips to prevent your client from paying self-employed tax penalties.
1. Pay the Same Amount from Last Year
Paying for the same amount of taxes from last year can help self-employed individuals avoid tax penalties. If they don’t have a copy of the taxes paid from the previous year’s tax return, divide their taxes into four equal payments and send each of them in by the IRS’ quarterly due dates on every 15th of April, June, September, and January.
However, if the taxes for this year turn out to be higher than last year, your client would still be liable for what they owe, but they wouldn’t be charged an underpayment penalty. It’s also worth noting that they will not incur a fine for not making any payments before tax return time. But be aware that your client could have a large tax bill by the end of the year for not sending enough to cover the debts.
2. Provide Professional Advice
Self-employment is a tricky move, especially for people who have worked in corporate or government positions for a long time. However, transitioning to a setup where they would have to do all the work will be an easy task with your help as a tax preparer.
During your client’s first year of self-employment, make sure you can be there to offer them sound advice to assist with handling all their tax calculations. The point is to figure out the amount to pay and the expenses to deduct and become comfortable with the process.
3. Open a Bank Account for Business Expenses
Life is easier if self-employed individuals could separate what they earn from what they spend. The easiest way to estimate quarterly taxes is by advising them to open a separate bank account and a credit card account solely for business purposes.
These accounts should provide people with a clean record of their business spending in a year, making it easier to use as a reference for paying taxes on time. Overall, it’s easier to keep track of your client’s spendings if they show on a list in a specific account made for tracking.
4. Keep Track of Your Client’s Income Regularly
Keeping a running tally of one’s income makes it easier to pay for estimated taxes on behalf of self-employed clients. You can compute their quarterly payments by calculating the sum of their total revenue at the end of each quarter.
You can use it as a guide for whether an increase or decrease for their quarterly payments is necessary. In effect, the payments you make for them will be more efficient and accurate all the time. Therefore, your clients won’t miss any charges and dodge penalties along the way.
5. Overestimate Self-Employed Tax Penalties
Since Self-Employed tax penalties can be a bit pricey, overestimating your client’s tax payments isn’t a terrible idea at all. As there is a fine for falling short, paying for more than the usual isn’t too bad considering the penalty they could get if they don’t meet their dues on time.
Tax charges are generally about 0.5 percent of the amount owed for each month they do not settle their taxes or hire a professional to do it for them. Also, the interest charged on the amount underpaid from the day of the quarterly payment is considered due until it’s paid.
Conclusion
Self-Employed Tax penalties are easy to avoid as long as people keep track of their income and tax payments religiously. Therefore, as tax preparers, following these simple steps should ensure your clients avoid paying tax penalties and use the money for other more important things.
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