OCTOBER/NOVEMBER 2019 VOLUME 3, ISSUE 8
T O P H ’ S TAX RESOLUT ION T I M E S
Escaping the ‘Hamster Wheel of Taxes’
First, there was the “cash flow roller coaster ride of being self-employed.” As the newly self-employed know, cash flow can be very inconsistent month-to- month. But the cash flow roller coaster isn’t the only ride the self-employed, or any taxpayer, may find themselves facing. There’s another ride, which we’ll call the “hamster wheel of taxes.” But unlike a real hamster wheel, getting off this ride can be a huge challenge if you don’t know what to do. But what is the hamster wheel of taxes? In short, it’s getting stuck paying back taxes while not addressing your current taxes. What I see with a lot of my clients, especially the self-employed, is that they have no tax withheld from their income. As a result, come tax time, they almost always owe state and federal taxes. In that first year or two, they are surprised by just how much they owe, and they can’t afford it. So, they wait until they can afford it. This is where the “hamster wheel” begins. By the time they can afford to pay year one’s taxes, it’s year two or three. But they want to pay year one’s taxes. So, they do. But when they do, they often realize they can’t pay year two’s taxes. They decide to wait again. By the time it’s year three or four, they finally pay off year two’s taxes, and the cycle continues. No matter what they do, they cannot get current with their taxes. At a glance, paying off back taxes seems like a good idea, but if you are neglecting your current taxes, it’s only putting you further behind. It’s actually better to let go of your back taxes — at least temporarily — to focus on the current year. I’m not suggesting you ignore the IRS, but I am suggesting you pay your current taxes before paying any prior year taxes.
current on your current taxes. Pay what you owe on the current year’s taxes. Once you are caught up with the current year, you can refocus on a plan to tackle your back taxes.
When you are caught up with the current year, the IRS is much more likely to work with you regarding your back taxes. Basically, paying off your current year’s taxes can give you leverage. The IRS sees that you have paid the current year’s taxes and that you are making a genuine effort to get your tax situation in order. If you do owe back taxes and you are working hard to take care
of the current year, this is when working with a CPA for the Self-Employed® can be beneficial. I frequently help clients take advantage of this newfound leverage with the IRS. The end result is an end to the hamster wheel — they are no longer going in circles trying to play catch-up. Instead, they can finally get on with their lives and their businesses.
Doing this can work to your advantage. You don’t have to steal from Peter to pay Paul. Instead, you can skip the cycle altogether. Here’s how it works: Get
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