If you haven’t yet gathered all your tax paperwork and found a tax professional who is familiar with the trucking industry, NOW is the time to do that and file for an extension. Late is not an option you want to pursue.
If you haven’t filed, either file or file for an extension. If you’ve gotten your taxes done but you’re coming up short on what you need to pay them, file anyway and just send in a partial payment or no payment at all. It is better to file and not pay or only pay a portion than it is to simply ignore your taxes. Talk with your tax professional about the best way to handle this. The IRS can and will come out and padlock the door to your home and impound your truck if you have unpaid back taxes and the penalties for not filing are stiff.
• Failure to File Penalty. This is calculated from the time your return was due and the penalty is five percent for each month the tax return is late up to a maximum penalty of 25 percent of the tax due on the return.
• Failure to Pay Penalty. This is 0.5 percent of the amount due for each month that the tax is not paid in full.
• Interest. This rate changes every three months and has ranged between a high of eight percent and a low of four percent in the past couple years.
As you can see failure to file carries the biggest penalty, so even if you can’t pay the bill when you file, it still pays to file on time. To give these penalties meaning let’s look at some real numbers. If you owe $4000 in taxes on April 15th and you fail to file and pay them until April 15th of the following year, your bill would be $5333.45. If you had filed on time but still waited until April 2011 to pay, your bill would only be $4,246.71. Not filing cost you $1086.74 more. So even if you have to wait a year to pay them, FILE YOUR TAXES now.
These penalties only apply to tax due. If you have a refund coming there are no penalties for filing late. But unfortunately many new owner-operators don’t realize that they need to be making estimated tax payments throughout the year and end up with a big bill at the end of the year. Once you’ve filed your first year's taxes it’s easy to calculate your estimated payments for the following year and if you’re using an accountant they should provide you with payment coupons for your payments. It’s that first year that gets many owner-operators and contract drivers into trouble as they may not even be aware of the need to file estimated taxes.
There are basically two strategies that you can follow in filing your estimated taxes. Under the rules you are safe if you pay estimated taxes equal to your tax liability for the previous year. So just take your taxes for the previous year, divide by four and make an estimated payment on April 15, June 15, September 15 and January 15.
The second method is to base your yearly projections on your current quarter and then adjust it as the year progresses. To use this strategy you would take your net revenue (what’s left after you deduct all your expenses for the quarter) and multiply it times four at the end of the first quarter. That will give you your projected income for the year. At the end of the second quarter you would take your net revenue for the first six months and multiply it times two to get your new projected income for the year. At the end of the 3rd quarter it’s a little more complicated, but still relatively simple. Take your net revenue for the first three quarters and divide it by 9 then take the result and multiply it times 12 to get your yearly projected income.
Once you have your yearly projected income you will take that and multiply it times your tax rate plus the self employment tax rate. To get your average tax for federal withholding take your 1040 for the previous year and divide your income tax, line 43, by your adjusted gross income, line 37. Now take that number and add the extra 7.65 percent self employment tax to it and you’ll have the tax rate you’ll need to figure your approximate tax amount.
If all this seems like a lot of work or math just isn’t your thing you can find a tax calculator on our forums, www.thetruckershelper.com Click the forum for Truck Taxes and you’ll find the calculator at the top of the forum. All you’ll need for the calculator is to put in your average income either weekly or monthly and the calculator will tell you how much you owe Uncle Sam using the current tax table rates.
Till next month, be safe.
John Ewing is a former owner-operator and the author of The Truckers Helper, business management software for truckers. If you'd like to ask questions or make comments on this article please visit our forums at www.thetruckershelper.com. We will be happy to answer any questions on trucking or managing your trucking business.