Secret Revealed – How Realtors Can Avoid IRS Penalties for Failure to Pay Quarterly Estimated Taxes
Realtors are among the group of self-employed individuals who in addition to paying income taxes on their earned commissions, are also required to pay self-employment taxes (FICA & Medicare). Unlike W-2 wage earners where the employer withholds income taxes and 100% of self-employment taxes, realtors have no taxes withheld from their commission checks. Wage earners can instruct the employer as to the amount of income taxes to be withheld. This allows the wage earner to plan ahead as to whether a small balance is due the IRS, or if the individual will receive a refund from the IRS. Realtors must have an internal process in place to safeguard themselves from running afoul of the IRS.
The IRS says estimated taxes (Form 1040ES is used to remit these payments) are due on April 15, June 15, September 15 of the current tax year and the final quarterly payment is due by January 15 of the following year. What often happens is that when these dates arrive, the realtor has already spent the last commission check on groceries, utilities, rent/mortgage, car, etc. and has no funds remaining to pay the quarterly income taxes. This process continues each quarter until the April 15 due date arrives. Since the realtor realizes that the funds are not yet available, often the “solution” is to file for a six-month extension of time to file. While the IRS automatically grants extensions of time to file, it does not allow extensions of time to pay (technically the IRS does grant extensions of time to pay, but very seldom (almost never) are these requests granted).
Now the realtor owes the IRS the income taxes due on the commissions earned, the self-employment taxes, plus interest and penalties. Sometimes the interest and penalties can be as great or greater than the taxes due.
So, what is the secret that will enable you to avoid this mounting tax debt?
The secret is to mimic a W-2 wage earner who has his/her payroll and income taxes withheld from each paycheck. Rather than waiting until the next due date rolls around to remit your quarterly estimated taxes, remit them when you receive your commission check. Work with your tax professional to determine what percentage of your commission check needs to be immediately remitted to the IRS (and don’t forget the state and local tax authorities). Here’s another secret, you can send money to the IRS whenever you want and it will be glad to accept it. The Form 1040-ES can easily be reproduced for those who like to use the U.S. mail. Even better yet, remit your estimated tax payments electronically to the IRS.
In a future blog post, we will discuss how to make an electronic payment to the IRS.
Disclaimer: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.
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