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Relevant Information Taxpayers Should Know

Group of construction workers, wearing formal clothing with helmets
Once you understand taxes, you’ll be much more relaxed

To comply with your civic duty to pay taxes, there’s a lot of relevant information taxpayers should know. The amount you have to pay varies depending on your profession and salary, so it’s understandable that this can cause confusion.

Certain professions, like fishermen and farmers, handle their taxes under alternative requirements to the rest of the population.

In this guide, we’ll cover estimated taxes, how to file taxes, the responsibilities of employees versus employers, avoiding tax fraud, and what to do if you’re an undocumented migrant.

Remember, you can contact us if you have any specific questions you need answering. Call us on +1 (704) 243-6333, contact us through our website or visit us directly at our office at 4801 E Independence Blvd, Charlotte, NC 28212.

Contents:

  • Estimated taxes
  • Filing your taxes
  • Responsibilities of employees and employers
  • Tax fraud
  • Taxes for undocumented citizens

Estimated taxes

Most people in the US pay estimated taxes. This means that, instead of paying the exact amount of taxes you owe precisely when you owe them, you’ll pay an estimation of how much you’ll owe in advance.

You can pay an estimation of your income taxes, taxes as an independent contractor, and the alternative minimum tax.

Who pays estimated taxes?

You might need to pay estimated taxes if:

  • You receive a pension or marital pension
  • Your employer doesn’t withhold enough of your salary
  • You receive interest
  • You earn dividends
  • You’re an independent contractor
  • You won an award or received a prize

If you’re an owner, partner, sole proprietor, or anonymous S-corp shareholder and expect to owe more than $1,000 in taxes in a year, you must pay estimated taxes on a quarterly basis.

Similarly, limited liability companies usually have to pay estimated taxes if they expect to owe at least $500 dollars in taxes.

Finally, you may well have to pay this year’s estimated taxes if you paid zero in the previous year. To resolve any doubts, you can consult the IRS website.

Closeup shot of a tax return
It’s essential to understand taxes

Who doesn’t pay estimated taxes?

You probably don’t need to pay estimated taxes if: 

  1. You’re a citizen or resident of the US year-round.
  2. The previous tax year covered it completely.
  3. You didn’t have any tax liability from the previous year.

In order to have no tax liability from the previous year, either your total tax owed must be zero or you must not need to declare your taxes. If you have any doubts, check this guide from the IRA.

If you’re an employee and don’t want to pay estimated taxes, you can ask your employer to withhold more tax from your paycheck instead. To do this, submit a W-4 form to your employer. There’s a section for you to record the amount you want to be voluntarily withheld.

Filing your taxes

Now you know what estimated taxes are, you probably want to know more about the process of filing your taxes. We’ll cover which tax form to use, how to send off your form, and the penalties you may face for making any mistakes.

Which tax form should I use?

The way you can file your estimated tax returns depends on the type of taxpayer you are; there are many forms, but we’ll outline the most common.

The majority of taxpayers pay their estimated taxes using a Form 1040-ES. To fill out the form, you must calculate your adjusted gross income, taxes, expected credits for the year, taxable income, and deductions.

To aid the process, calculate your estimated tax for the current year based on deductions, last year’s credits, and your income. As a guide, you can also use the previous year’s tax return or the guide included on the form.

If your estimation ends up being greater than what you actually earn, you can calculate less in the next quarter to offset it.

If you have a limited liability company or corporation, you’ll need to fill in a Form 1120-W instead. You can find out more about taxation for business owners in our guide to work independence.

Infographic showing different tax forms
Make sure you use the right tax from

How do I file taxes?

The fiscal year is divided into four quarters for tax payments.

You can pay online, by phone, by post, or by email. However, the easiest and most practical way to pay is through the electronic payment system. It’s available to all types of taxpayers and all kinds of payments — including tax deposits, estimated taxes, term plan payments, and more.

You can pay on a weekly, bi-weekly basis, or monthly basis as long as you’ve paid by the end of the quarter. One advantage of making payments electronically is that you can access your payment history whenever you need it.

If taxpayers are late in filing their taxes, the IRS recommends they file electronically.

The software includes the relevant threshold for your status and will inform you of your total debts, penalties, and if you’re eligible for penalty relief

Fines and penalties

You might receive a fine if you don’t pay the correct amount of your taxes, if not enough is withheld from your wage, or if you default on your payment. This can happen even if you’re benefiting from a refund when you file your return.

However, you can usually avoid a fine if you owe less than $1,000 after subtracting withholdings and credits. Especially if you paid around 90% of the current year’s tax or 100% of the previous year’s tax. 

If you earned an irregular income, you can avoid the fine or reduce it, depending on whether you made unequal payments or annualized your income.

To find out if you owe penalties for insufficient estimated tax payments, you can use the forms 2210 or 2220. If you do owe money, check the indications on Form 1040 or Form 1120 to find out how to report it.

The IRS might grant you exemption from a fine in exceptional circumstances such as non-compliance or late payment due to a natural catastrophe, retiring, or suffering from an accident or disease.

In the tax year 2018, the IRS lowered its threshold by 80% so more taxpayers could receive a respite from the penalty for insufficient withholding tax and tax payments. In 2017, the IRS lowered that threshold by 85% so even more people were eligible.

The lower threshold has had a positive impact on many taxpayers’ finances. Now, taxpayers must make the minimum payment of 80% of the year’s total tax debt through withholding income taxes, quarterly payments of estimated tax, or both options combined.

Infographic about tax penalties
It’s easy to avoid penalties and fines

Responsibilities of employees and employers

Both employees and employers are responsible for collecting taxes.

In the vast majority of cases, the employer withholds employee taxes. However, if the employer doesn’t withhold taxes for whatever reason, or if you’re an independent contractor, it’s your responsibility to do the withholding.

Group of workers from all branches of work, with the U.S. flag in the background
Both employees and employers have responsibilities

Employers

As an employer, you’re responsible for reporting the income and taxes you withhold from your employees. You can do this by filing a Form 941. You must deposit the taxes into an authorized bank account that meets the requirements for federal tax deposits. 

Employers must also file a FUTA return each year, including the corresponding tax deposit.

If you’re an employer and you don’t comply with tax obligations, you’ll be subject to a civil or criminal sanction. Even if it’s your employees that didn’t withhold or send their taxes, it won’t matter to the IRS — you’re responsible. 

This could affect your eligibility for Social Security, Medicare, or unemployment benefit.

Employees

If you’re an employee, it’s your employer’s responsibility to withhold taxes and file a Form W-2

In the case that your employer refuses — or if they’ve withheld your salary but haven’t made the corresponding deposits — you can file a  Form 4852, which is a substitute for the W-2.

You must submit the Form 4852 along with your tax return. Make sure you provide clear information and the correct calculation of your income and withholdings — you can find the figures you need on the checkbooks of your wage checks.

Alternatively, if you suspect your employer is withholding taxes in an unusual way, you should ask the IRS for advice. You can call toll-free on 1-800-829-1040.

If your employer doesn’t want to withhold payroll taxes, you become responsible for paying both your income and taxes and the FICA tax portion.

Unfortunately, you can end up in serious trouble if your employer evades taxes, even though it’s not your fault. If it’s found that you intentionally didn’t pay your payroll taxes, you’ll be liable for criminal sanctions.

However, you’ll still receive Social Security Medicare and unemployment insurance. Taxes withheld and duly paid by employers are used for reimbursements and insurance benefits for employees whose employers didn’t withhold or pay taxes.

Infographic showing the responsibilities of employees and employers
Check your employee or employer is behaving correctly

Tax fraud

Failing to file or pay your taxes is serious. It’s considered tax fraud — and not complying with the law has serious consequences.

Even if you can’t afford to pay, the IRS can offer you a payment plan. It’s far worse to not file the return, as this will render you a criminal and lead to greater penalties. Let’s outline how taxes are audited and what happens if you don’t play by the rules.

Man in a suit avoiding bullets from taxes
There’s more to life than taxes but they are important

Auditing

All taxpayers fear an IRS audit. Even if you didn’t purposely commit fraud, filing your taxes is no easy task, so it’s normal to be concerned you made an error.

To relieve your worries, it’s best to seek help from a professional. Especially as tax law is often changing — even the slightest mistake can land you in trouble with the IRS.

In the fiscal year 2015, the IRS accused 1,330 taxpayers of tax evasion. Fines, penalties, and sentences vary depending on the quantities of money involved,

You could be guilty of tax evasion if you don’t properly declare:

  • Taxes
  • Income
  • Credits
  • Deductions

Or if you file your taxes late.

Infographic about tax fraud
It’s simple to avoid tax fraud

Consequences of tax evasion

If you’re found guilty of tax evasion, you may be sentenced to time in prison, supervised parole, or receive a penalty corresponding to the amount of money you dodged. Some people receive both jail time and a fine. 

Usually, lawsuits are a result of audits, which is why taxpayers are so afraid of them. Sometimes audits reveal the truth about deliberate evasions that have been ongoing for several months — or even years.

The most common problem is when taxpayers don’t declare their taxes, which leads to a criminal investigation The IRS takes a close look at bank transactions, the sale of the business, sources of income, and perhaps a secondary income.

Another aspect that the auditor the IRS takes into account during an audit is your behavior. If they find that you’re trying to hide certain information on purpose, it may be enough to initiate criminal proceedings — no matter how innocent it appears.

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Don’t be greedy

Cases of tax fraud

It can be hard to grasp the severity of tax fraud just from reading about it. Or maybe you know people who have committed tax fraud without being caught.

The cases below are all examples of investigations for labor tax fraud from court filings, available for the public domain.

Pennsylvanian businessman Paul Biko was sentenced in 2016 to 18 months in prison plus a penalty of $437,336 for evading taxes

In 2008, he owned three businesses: Clearview of Harrisburg; Clearview Landscaping, and Clearview Builders. He managed the economic affairs of those businesses. At the end of the year, the companies retained the payroll taxes of their employees but failed to pay income taxes and FICA taxes to the IRS. 

There are also some further examples:

  • Michael Manning — sentenced to 18 months in prison, two years’ supervised release, and a penalty of $677, 350 dollars in 2016
  • Larry Eifling — sentenced to 24 months in prison and 3 years on supervised parole in 2009
  • Tammy J. Devier — sentenced to a 60-month  supervised sentence on probation, 12 months of home confinement, and a penalty of $377,163 in 2016
  • Frank Eugene Gemignani III — sentenced to 12 months in prison, a supervised conditional year, a fine of $255,452 in 2016 
  • Robert Smulski — convicted for 12 months in prison, two years of supervised parole, and a fine of $484,339 in 2016 
  • Thomas Leroy Watson — sentenced to 18 months in prison and $110, 822 in 2016
  • Joseph Patrick Balano — sentenced to 27 months in prison plus $493,443 in 2016
  • David Leon Barker, Jr — sentenced to 15 months in prison and 2 years of supervised probation, and a penalty of $1,415,570 in 2015

The takeaway

I could write a book about all the cases of tax evasion. I’m not saying this to scare you, but to remind you of the severity of tax evasion. You might have heard some people claim the IRS doesn’t pursue evasion cases, but this is a complete lie.

As you can see, those who committed fraud to use their tax money for other purposes ended up having to pay back not only the money they owed but also extortionate fines and accrued interest rates accrued. 

You could lose all your assets through this process and go bankrupt — it’s just not worth it.

Fingers walking across a tightrope
Tread carefully with your tax returns

Taxes for undocumented citizens 

It doesn’t matter what your immigration status is: you must file a tax statement. The United States is very strict in this regard, so we’ve written a guide especially for undocumented workers.

Don’t let your fear of deportation prevent you from filing taxes. The IRS won’t share your information with other agencies unless it’s related to a serious crime. As long as you’re an honest person and worker, your information will be protected. 

Filing your taxes regardless of your immigration status may act in your favor.

The US legal system can be strict

Individual Taxpayer Identification Number

Since undocumented immigrants don’t have a social security number, they must file their taxes with an Individual Taxpayer Identification Number (ITIN). The IRS issues ITINs — but again, don’t worry, they won’t share your data.

You can apply for your ITIN at the same time you file your taxes by filing a W-7S form and attaching your tax statement from the previous year. You’ll receive your ITIN in approximately six to seven weeks.

Infographic about ITINs
Everything you need to know about your ITIN

Obtaining citizenship

If you’re currently an undocumented citizen, you probably hope to obtain your citizenship at some point. Fulfilling your responsibilities as a taxpayer can play an important role in reaching this goal.

When you apply for legal status in the country, the USCIS (US Citizenship and Immigration Service)  will look at whether you’ve paid a substantial amount of taxes to the federal government. 

Applicants who prove that they’re making an effort to comply may be eligible for naturalization, whilst those who don’t stand little chance.

Bottom line

It’s overwhelming to learn about the tax system for the first time, especially the tax system of a different country. 

But don’t let the fear of being audited or filling in your taxes wrong put you off starting a business.

Call us on +1 (704) 243-6333, contact us to learn more about how we can help you fulfill your tax duties.

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