Paying Federal and State Taxes – Withholding and Exemptions
Since World War II, the IRS has been a pay as you go system. Prior to that time, the IRS simply collected their monies at the end of the year when one’s annual tax return was filed. Pay as you go withholding was started in an effort to help fund the war effort. It was the stated intention at that time that after the war was over, the pay as you go portion of the tax code would be repealed and tax collection would revert to the pre-war system. However, as you well know, Congress has not reinstated old tax law and our system remains a pay as you go system.
"I do not anticipate that our tax system will ever revert to the laws which existed prior to this time so we will go forward with examining our laws at present and how best you can be prepared to satisfy your year-end obligations without unnecessarily exposing yourself to penalties and interest which otherwise could be avoided. We are a Gwinnett and Metro Atlanta Business Owner making sure you always pay your lowest legal possible tax."
— Duluth CPA, John Dillard, CPA
Many entities by virtue of their tax treatment as flow through entities do not pay any income taxes when the returns are filed but rather the income is communicated to the partners via a K-1 which is a part of the return. The entity’s partners are then responsible for reporting their portion of the earnings on their personal/appropriate returns. Thus there are many entities such as Partnerships, LLC’s, LLP’s, and S Corporations for which no income taxes are due when these returns are filed.
Often however there are net worth taxes, for which individual states access, as well as franchise taxes which are due to the state departments of revenue where a business transacts business. C Corporations are responsible for paying their taxes as they go and they do not have the ability to pay all of their taxes at year-end and still avoid assessed penalties and interest. Thus, it is critical to tax plan several times a year to determine the ultimate amount of year-end liability due and to take appropriate measures to plan accordingly.
For all of our clients who are S Corporations we suggest that you tax plan at least twice annually. At that time it is also advantageous to review a client’s internal finances and obtain their projections of profits for the rest of the year. By utilizing this information as well as by being aware of their personal return issues, itemizations, exemptions, etc. you are able to get an estimate of what your taxable income and your tax will be.
Rather than making estimated payments in addition to withholding on your salary, I have found it advantageous to have owners increase their withholding to pay their estimated tax. This has several significant advantages — you do not have to make additional estimated payments to the IRS as well as state.
Both the IRS and states require you to pay as you go, requiring you to pay enough in estimated taxes due on the profits/taxable income generated each quarter. Tax law treats payroll withholding as being paid evenly throughout the year, making only the settlement of your year end taxes the IRS and state’s concern rather than every individual quarter.
Tax law continues to change in regards to the legal avoidance of penalties and interest if you pay a portion of your tax at year end. Generally speaking and greatly simplifying tax law I advise my clients to pay at least 110% of their prior years tax and usually they will be able to avoid penalties and interest assessments.
Corporate returns are due two and half months after the end of the company’s fiscal year, which means if you have a calendar year end they are due March 15th. Personal Returns, LLC’s, LLP’s, and Partnership returns are due three and one half months after year-end, which would result in your return being due April 15th for calendar year end taxpayers.
Extensions are a legal way of notifying the IRS that you plan to file your return after the original due date. Both C and S Corporate returns are due March 15th of each year or two and a half months after year end. Personal returns, Partnerships, LLC’s, and LLP’s are generally required to be a calendar year return and are due April 15th of each year or three and a half months after year end.
The IRS allows a six month extension for both Corporate and Personal Returns, however please note that this is solely an extension of time to file and not an extension of time to pay and any late payments will result in assessments from both the IRS and state for penalties and interest. Please be advised that the penalties are even worse if you do not file the extension or the original return by the due date. These incentives are simply in place to give you time to file and pay. The Corporation and Personal extensions are for six months and accordingly expire on September 15th and October 15th respectively. There are no valid extensions available after this date.
Perhaps there is no greater area of tax law so complex and confusing. Our keep it simple style removes the shroud of confusion and assist those who want to avoid unnecessary penalties and interest. Call us today to see how we can help you.
His CPA PC (A Christian CPA Firm) Offers Free Initial Consultations/Interviews offering:
- Atlanta Tax Problem Resolution & Tax Advocacy
- Atlanta IRS/GA Offer in Compromise Submission & Filing of Back Taxes
- Atlanta Installment Plans & Tax Mitigation
- Atlanta Tax Penalties, Liens, Levies, Garnishment & Seizure
- Atlanta Trust Fund Assessments, 100% Penalty and Penalty Abatement