Ep 8 | What You Need to Know About Filing an Extension This Tax Season
As a creative boutique owner, keeping up with your books and filing taxes may not always be top of mind. When you're trying to do it all on your own, this can be an added challenge. Now, we are in the throes of tax season and we want to make it as smooth as possible for boutique owners, so we brought on Angi McClish, our CPA Consultant at HarQuin Boutique Bookkeeping Co, to tell us everything about filing an extension on your taxes - in case you don't have your books ready. We hope this podcast benefits you and makes things smoother for you moving forward!
What is an extension? And what's the key thing to know about filing an extension?
An extension is what we use in the tax world if we don't have all of our paperwork together; we may need more time and that April due date is coming up. So an extension is something that we file with the IRS to request an additional six months of time to get the paperwork.
How do you apply for an extension? If you're an individual filing an extension you would go to the IRS website and download the form 4868 and file that by either mailing it in for where you live based on your home state - or you can file it electronically using the IRS website as well and that's www.irs.gov.
It's an extension of time to file the actual forms but not an extension of time to pay the tax that you're going to owe for last year. A lot of people don't realize this. One reason we file an extension is because we're not prepared or we're waiting for more information to come in - this is why it's so important to be prepared by having your books in order and have a good idea of where your business net income is for the prior year. This way you or your CPA can do a really good estimate for how much you're going to owe. Because if you're going to owe tax and you're making money you're going to need to pay in with the estimate how much you think you're going to owe from last year. If you don't pay in all of your tax by the due date of the tax return then what can happen is the IRS will charge you an underpayment penalty or a late payment penalty and that charges you a penalty and interest on anything that would've been due by the time you file your return - even if you file the extension. In other words, at the end the IRS will always go back in time and charge you interest for whatever you didn't pay.
We recommend paying quarterly installments and then when you get to the end of the year it's not a surprise. We also forget that not only is it an extension for the prior year's tax but it's also the deadline for the first quarter of your current year, so staying current with your bookkeeping and keeping ahead of that is a really good thing. This is where having a good bookkeeper helps. For example, with our services we're sending you out with a monthly list of needs in your reports, so you know every month what is still outstanding so by the time you get to December's bookkeeping and you're in the first quarter of the next year getting all your tax stuff together, all you need to do is finalize December rather than having to scramble and go back into the whole year.
We always think we'll remember things, but we forget. So doing it a month out is huge rather than doing it all at once - you won't miss things either, which is important for tax purposes. We have a lot going on as mothers and business owners and there's lots of moving parts so we really need to have a good bookkeeper.
Know your state extensions as well. Along with your federal extension, if you live in a state with a state income tax, you're likely going to have to pay in an extension at the same time because all the states have the same rules. Cities are the same way.
A recap:
The biggest thing people don't realize is that it's only an extension of time to file the paperwork not an extension to pay the tax.
In April the IRS wants you to estimate and pay even if you over or under pay.
The first thing is to get your books together to get a good estimate.
After that you go to the website form.
April 15 is also the first installment for your quarterly 2022 taxes.
Make sure you get everything to your bookkeeper asap so you'll be prepared to calculate your income. If your books are still a mess you need to get with your bookkeeper or we can do that for you. Stay tuned tomorrow because we are dropping a new module in Boutique School that will also support you for tax season with videos from Angi.
Take the first step to getting your books in order and fill out the estimate form here. For more content like this, join us in Boutique School - a membership training with our boutique bookkeeping experts to equip you in how to run a business.