After taking a vacation in March, I was able to start collecting unemployment soon after. I chose not to have any tax withheld on my payments because I had to invest in my savings to pay the bills and I thought I was going back to work.
In short, it became clear that my job was not coming back so I only accumulated unemployment for 11 weeks and instead started freelancing in early July. I still freelance full time and earn just enough to keep up to date on my bills. The big problem is that I didn’t put any money aside for unemployment taxes or freelance taxes. That said, I only paid taxes for about two and a half months in 2020.
With 2021 almost here, I’m scared of the tax burden that will be waiting for me. I am also concerned about the penalties. Can I be fined for not paying taxes for almost a year? That makes me very stressful. I have little savings left, so I can’t just write a check to the IRS. Please help me!
You have not committed tax evasion. You have not submitted a fraudulent return. At this point, you haven’t even filed a tax return. I hope what I’m about to say will make your breathing easier. This is likely to be an extraordinarily common problem for the 2020 tax year as many people rely on unemployment and freelance work to survive.
Yes, technically you should have paid taxes on your unemployment and professional income. The US tax system is “pay as you go,” which means you should pay tax when you make money instead of keeping it all for year-end. To the Taxes on unemployment benefitsIf the state does not withhold money, you should make quarterly tax payments, just like you would with professional income.
However, the consequences of not doing this aren’t too painful. Without going too deep into the rabbit hole of the IRS rules, the penalty for late payments is typically 0.5% of your monthly debt, provided you file your tax return on time. You can avoid the penalty altogether if you owe less than $ 1,000. If you can’t afford to pay the bill, you can easily set up a payment plan through the IRS. However, we will deal with it shortly.
But I’m less concerned about your 2020 tax bill than I am about your 2021 tax bill and beyond. They don’t say if you plan on doing freelance work or if paying the bills until you find a full-time position is a stopgap measure.
Regardless, as long as you are freelancing full time, you have to find a way out Budget for taxes. Whether that means taking extreme cost-cutting measures or making more money by getting a part-time job, finding new clients, or increasing your prices is up to you. The fact that you managed to move your freelance work to full time status in just 11 weeks shows me that you are resourceful.
The first step is to estimate how much you will owe. You can do this simply by using the Tax Deduction Estimator at IRS.gov. Of course, for practical reasons, you need to know this number. However, once you understand what you are dealing with, you can also relax. When dealing with the unknown, we often envision the most catastrophic scenario possible. Reality may not be as bad as you imagine.
You are actually not as lagging as you think you are. Quarterly taxes are not due in even increments. Taxes for the four-month period from September to December are not due until January 15, 2020. So you are really just two months behind with taxes on your unemployment benefit and professional income. If you’re able to cut costs or do extra work, try putting money aside so you can make at least a partial payment in January.
Your tax situation is likely so simple that you can set up a payment plan at IRS.gov/payments without speaking to a person. Whatever you do, please don’t put this tax on your credit card. This 0.5% monthly fee equates to 6% per year, which is undoubtedly better than your credit card interest rate.
Even if you can’t afford to pay a dime, make sure you do submit your tax return punctually by April 15th. The penalty for failing to submit applications is 5% per month of your debt and not 0.5% if you are able to file but fail to pay. The lesson here isn’t afraid if you can’t afford to pay. And whatever you do, don’t try to hide from the IRS.
Robin Hartill is a certified financial planner and senior editor at The Penny Hoarder. Send your tricky money questions to [email protected].
This article originally appeared on www.thepennyhoarder.com