QUESTIONS?

Q: What should I do if I don't have the money to pay my estimated tax payment on time?

A: On the due date pay as much as you can, but keep a copy of the estimated tax voucher. When you have saved the rest you can send in a second payment for that same quarter. Remember the reason we pay estimated taxes is to avoid being assessed a penalty. This penalty is calculated like interest, on the amount of the underpayment only for the period of the underpayment. Currently the interest rate used is 9%.

To illustrate let’s say you needed to pay $1000 on September 15th but didn’t pay it until October 1st. Your payment of $1000 was outstanding for only 15 days, so the penalty would be only $3.70 ($1000 X 9% = $90 divided by 365 days = $.2466 per day times 15 days).

It has been my experience that IRS does not usually send a bill for this penalty unless it is substantial. I’ve seen bills for $75-100, but not for amounts less than that. However, if they have other reasons to send you a bill (for instance, if they propose a change to the calculation of your tax) they usually will include even a small penalty for underpayment of estimated taxes.

So, be certain you know the minimum amount you need to pay on each due date to avoid the penalty. Then, if you have to be late, send it in as soon as you can. Don’t make the mistake of thinking that once you’ve missed a payment you might as well just pay double the amount the next time. That won’t work out as well for you.

A: You are right that you don’t need a Federal ID number (EIN) if you don’t have employees and you are a sole proprietor (not a corporation or a partnership). I know the bank may make you feel like you’re a bit crazy, but you are right! The rule the bank employee is confronting you with is the bank’s rule! Many banks have their databases set up to accept an ID number for a commercial or business account only in the format of a Federal EIN such as: 01-4578234.

How to deal with the bank? You could try giving them your social security number. They can input it with the dash after the first two digits if their system requires that format. This would be alright if the account does not earn interest income. If it does earn interest, then the bank would be reporting it to IRS on Form 1099-INT with an incorrect ID number.

So, even though you don’t need a Federal ID number for IRS purposes it may be easier to deal with the bank by applying for one anyway. It’s not that hard to do it now. I used to warn against applying for unneeded numbers because your action would be telling IRS you had employees and the would start sending payroll tax forms out to you! We had many nightmares with that in earlier years. Now, they allow you to designate that you want the number "for identification purposes only". The only trick is in properly completing the application form.

Obtain a copy of IRS Form SS-4, Application for Employer Identification Number and take a deep breath. The top section is self-explanatory. In line 8a, Type of Entity, check the "sole proprietor" box and enter your own Social Security Number. In line 9, Reason for Applying, check the "banking purpose" box and note "business bank account" on the line. In lines 12 and 13, be sure to answer the questions about wages and number of employees with "N/A". The rest of the form is easy.

Notice that you can have a number assigned to you over the telephone by following the Tele-TIN instructions. You still have to complete and mail in the Form SS-4 to use this method.

If, after following these instructions, you begin receiving employment tax forms such as Form 941 or a payment coupon booklet that you don’t need because you have no employees, be absolutely certain to follow up at an IRS office or by calling the IRS information number 1-800-829-1040.

A: As long as you do NOT call them in the middle of tax season, most accountants will be happy to consult with you and will not insist on preparing your tax returns or doing your bookkeeping. I encourage you to continue to do your own recordkeeping and even your own tax return preparation as long as you are doing them well, not receiving error notices, and are creating useful and timely financial information. It is perfectly normal to have questions about interpretations of the tax rules, how to apply the rules to your specific situation, how to create even more accurate records and how to better utilize the information. You do need to establish a good relationship with an accountant.

Since you are a do-er, you may have to look a bit longer for an accountant who will support you in your efforts to be independent. Keep interviewing accountants until you find one who will give you clear and complete explanations, provide you with needed forms, be willing to meet with you or consult with you on the telephone for an hourly fee. Consult your own internal radar detector to determine if they are giving you their complete and respectful attention.