For a small business owner or an independent contractor, few obligations cause more stress than taxes. Other than that, a huge tax bill. Unfortunately, at some point in your self-employment career – AND in your total surprise – you may come across a tax bill and will ask yourself, “What? Why did I get this tax bill?”
Here are some tips for understanding your tax bill and how to prevent getting more.
Step One: Pinpoint the Cause
The first step is to pinpoint the cause of the tax bill. Your tax return may have been:
- Selected for audit
- Not filed at all, or
- Simply missed a payment.
You should pinpoint the cause because your notice may or may not clearly explain the reason. Also, the tax bill may not be written laymen’s terms. Don’t be shy to get help understanding your notice from an experienced professional. Many pros will gladly explain it to you at no cost.
Step Two: Address the Cause
Next, you’ll want to address the cause of the bill. Here are some solutions:
- Provide the required information.
- File a missing tax return.
- Set up a payment plan to avoid further collection action.
If you agree with the bill but cannot afford to make payments, you may qualify for a hardship exception or payment adjustments. However, you choose to address your tax bill, plan and execute it promptly; tax notices usually come with a deadline.
Step Three: Keep Complete and Accurate Tax Records
Lastly, make sure to keep complete and accurate records of your income and expenses. Get a bookkeeping system and store bank statements and receipts. Keeping your bookkeeping and accounting organized will help prepare an accurate tax return which will, in turn, help avoid audits and overpaying taxes.
How Can I Prevent a Huge Tax Bill in the Future?
We will devote another blog post on tax bill prevention. But for now, make quarterly tax payments: pay your social security, medicare and income taxes. Finally, and the most important, is file and pay your taxes on time. Taking these steps will help prevent more tax bills in the future.
Don’t let those tax bills scare you! It’s easier to resolve than you think and your tax preparation specialist will guide along the way. We hope these steps and tips are helpful.