JK Harris and Company, Creating Lifetime Clients

As we discussed in the previous installment of Short-term Relief Can Cause Long-term Nightmares, today’s economic climate makes it extremely difficult to maintain financial stability. The choices we make each day can provide us with small amounts of disposable income, which can be good when times are tough, but very dangerous in the future. As we saw with adjusting tax-withholding amounts, getting a few extra dollars on your current paycheck is likely to increase your financial issues in the long run. For the purposes of this entry, we are going to discuss the dangers involved with underpaying quarterly tax payments and the reasons why you should avoid this practice as much as possible. This particular situation is more applicable to small business owners, then it is to the average wage earner, but it is definitely beneficial for everyone to understand considering that small businesses are the backbone of the US economy.

In order to properly understand the practice of underpaying quarterly tax payments, let us first identify what these payments are and how the individual responsible for them handles them. If your income tax withholding for the year is not going to cover the amount of taxes you are going to owe at the end of the year, you need to make estimated tax payments (or make sure that you have plenty of money saved up at the end of the year, to cover a large liability owed to the IRS and/or State Department of Revenue.) Estimated tax payments are paid every three months, hence the fact they are called quarterly tax payments. As mentioned above, these types of payments are usually made by small business owners, but keep in mind that self-employed individuals, like landlords, investors or professional gamblers fall into this category as well. Since self-employed individuals and small business owners are responsible for their own tax payments, as opposed to employees who have a payroll department that handles these types of payments, they require proper planning.

Now that we understand what these payments are, let’s discuss the ways they are handled improperly and the dangers of doing so. In many instances, self-employed individuals and small business owners will not makes these payments on a regular basis. Depending upon how business cash flow is, or how their personal financial situation is, they will underpay their quarterly taxes, or even skip payments altogether. As is the case with adjusting tax-withholding amounts, handling quarterly tax payments in this fashion will generate short-term cash flow, by allowing the individual to retain more disposable funds at that current point in time. Once again; however, this is an extremely dangerous practice. If business does not improve, or it gets worse as the year goes on, the likelihood of having disposable income at the end of the year, to catch up on these payments is extremely low. If the individual taxpayer is unable to make up these payments at the point in time when tax return filings take place, they will be subject to large amounts of penalties and interest, which lead to increased tax debt and a far worse situation then the individual was previously in.

Prior planning, low risk solutions and financial responsibility are all keys in avoiding long-term financial nightmares. We have seen that poor decisions in regards to the handling of various tax types may provide small amounts of disposable income now, but the risk definitely isn’t worth the reward. Keep that in mind, the next time you consider your options for short-term financial relief. Always remember that there is no easy way to make fast cash and if it seems easy, you better be aware of the consequences before you proceed.

Posted by Chris Dubeau