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One thing nobody's mentioned - make sure you're filing your S Corp extension ELECTRONICALLY if possible. Paper extensions can get lost or delayed. I learned this the hard way last year when my mailed extension wasn't processed and I got hit with late filing penalties. Had to go through a whole appeal process to get them removed.
Wait, can you file the S Corp extension (Form 7004) electronically yourself? Or do you need a tax professional to do it? We're trying to save money where we can since our first year was so rough.
Yes, you can absolutely file the Form 7004 electronically yourself! You don't need a tax professional. You can use the IRS e-file system, or many tax software programs include the ability to e-file the extension. If you're really trying to save money, even the free versions of some tax software will let you prepare and e-file just the extension forms. Just make sure you still estimate any taxes owed properly, as the extension only gives you more time to file the paperwork, not more time to pay.
Don't forget that while the S Corp itself doesn't pay income tax, if you have employees (including yourself as an owner-employee), you still need to make sure all your employment tax deposits are current. The extension doesn't apply to those!
This is so important! My friend got an extension for his S Corp but didn't realize he still needed to make his quarterly payroll tax deposits on time. Ended up with some hefty penalties.
Whatever you do, don't ignore this! I made that mistake and ended up with a tax lien that destroyed my credit score for years. The IRS has more collection power than any other creditor. Call them directly, be honest about your situation, and they'll usually work with you. Despite their reputation, most IRS agents I've dealt with have been reasonable when you're proactive about resolving your debt.
This is so true. My brother ignored his tax debt and eventually had his wages garnished - they took 25% of his paycheck until the debt was paid. The IRS doesn't mess around with collections.
Exactly. And garnishment is actually worse than a payment plan because you have no control over the amount taken. With a payment plan, you can at least negotiate a monthly amount that works for your budget.
Has anyone actually tried requesting penalty abatement themselves? I've heard mixed things about how likely the IRS is to approve these requests.
I successfully got First Time Penalty Abatement last year. The key is that you need a clean compliance history for the 3 prior years. If you meet that criteria, they almost always approve it. I just called and specifically asked for "First Time Penalty Abatement under IRM 20.1.1.3.3.2.1" and the agent processed it right away.
Has anyone considered filing a paper return this year instead of e-filing? With all these security issues, I'm thinking old school might be safer, even if it means waiting longer for a refund.
Paper filing is even worse right now. My brother filed paper last year and it took 11 MONTHS to get his refund. The IRS is still struggling with massive paper backlogs from the pandemic. Plus mail theft is at an all-time high, so your tax documents with SSN and all your info could get stolen from your mailbox.
I had no idea the paper backlog was still that bad! Thanks for the warning about the mail theft too, that's something I hadn't considered. I definitely don't want to wait 11 months for my refund either. Looks like I'll need to find a secure e-filing option after all. This whole situation with eFile.com is making me paranoid about which tax software to trust. Maybe I'll look into those options the cybersecurity person mentioned above.
I just checked and the IRS has actually removed eFile.com from their authorized e-file providers list as of this morning. I was halfway through my return with them - thank god I didn't submit yet! Anyone know if there's a way to report if you think you might be affected? I entered my SSN and everything...
You can report it to the IRS Identity Theft department. Call the dedicated Identity Theft line at 800-908-4490 or fill out Form 14039 if you suspect your info was compromised. Also freeze your credit reports ASAP with all three bureaus!
I've been in the restaurant industry for 8 years, and this tip/tax withholding issue is super common. Your employer is supposed to make sure enough is withheld to cover your tax obligations, but with the $2.89/hr base pay and insurance deductions, there's often nothing left. What I do is submit a W-4 with additional withholding specified, so they take extra from my larger paychecks (when I have good tip weeks). It's not perfect but helps avoid a massive tax bill at filing time. Also, make sure your employer is applying your reported tips to your Social Security earnings. Some shady places don't, and that affects your future Social Security benefits.
How do you figure out how much extra to have withheld on your W-4? I always end up owing hundreds and get hit with an underpayment penalty too.
I use the IRS withholding estimator tool on their website. It lets you input your expected tip income and other variables, then recommends how much additional withholding to request on your W-4. For the underpayment penalties, you might want to look into making quarterly estimated tax payments instead of waiting until filing season. That's what I started doing - I set aside about 15% of my tips each week, then make quarterly payments using Form 1040-ES. It's a bit more work throughout the year, but way better than getting hit with those penalties every April.
Has anyone used the free VITA (Volunteer Income Tax Assistance) services for this kind of situation? I know they help with taxes if you make under $60,000 and I'm wondering if they can handle restaurant worker tax situations with all the tip complications?
Felix Grigori
Owing a little at tax time is actually a GOOD thing from a financial perspective! I'm a CPA and I always tell my clients that the goal should be to owe just under $1,000 come tax time. Think of it this way - if you're getting a big refund, you've essentially given the government an interest-free loan all year. That money could have been in your savings account or investment portfolio earning returns! The sweet spot is owing just under $1,000 because that's generally the threshold where the IRS might assess underpayment penalties. So you've kept as much of your money as possible throughout the year without crossing into penalty territory.
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Felicity Bud
ā¢What about the psychological factor though? I know financially it makes sense, but I LOVE getting a big refund. It feels like a forced savings account and I usually use it for something fun or a big purchase I've been putting off.
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Felix Grigori
ā¢That's actually a really good point! Personal finance isn't just about the math - psychology plays a huge role too. If getting a refund works as a "forced savings" mechanism for you and you enjoy that annual windfall, there's definite value in that approach for many people. I always tell clients to do what works best for their lifestyle and habits. For some people, the discipline of keeping that extra money each paycheck and investing it is tough. If you know you'd just spend that extra $50-100 per paycheck on random things, but would use a $1,200-2,400 refund for something meaningful, then by all means, set your withholding accordingly!
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Max Reyes
Am I the only one who deliberately overwitholds so I get a big refund?? I know everyone says it's an "interest-free loan to the government" but honestly it's the only way I save money lol. I get about $3200 back every year and use it for vacation.
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Mikayla Davison
ā¢You're definitely not alone! I do the same thing. With interest rates on savings accounts being so low for so many years, I didn't feel like I was missing out on much. And there's something really satisfying about getting that big deposit all at once.
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