While most of us only think about taxes each spring, if you have a job, your employer probably takes them out of each paycheck over the course of the entire year. This money is submitted to the IRS and, at tax time, you’re basically checking in with the IRS to make sure you’re all squared up. Think of it as reconciling your bank account. If you’re self-employed, you can technically avoid paying for the entire year, but there are repercussions for that. On Tax Day, you’ll owe the taxes you didn’t have withheld, as well as penalties on the amount. Still, whether you’re on salary or self-employed, taking a few months off from your tax debts can give you a little extra money when you need it.
You can adjust your tax withholding or hold off on quarterly payments for a few months, but you may owe that money plus possible penalties come April.
Temporarily Stop Tax Withholding
Life can throw unexpected surprises at you sometimes. Maybe the holiday shopping season is draining your bank account or perhaps you had a series of unplanned expenses like a new home air conditioner or major repairs on your car. If you look at your paycheck and wonder how you can get just a little more money each week, you may notice that reducing the income taxes being withheld could be a big help.
You may not realize it, but you have a small amount of control over how much is withheld from each paycheck. The W-4 Form you completed when you started your job determines, in part, how much is taken out. The IRS directs taxpayers to a calculator to help guide them on what they should claim to get an accurate amount taken out of each check. However, if you want to have less withheld from your check, all you have to do is change the number of allowances you’re taking.
Understand Your Withholdings
When you’re completing your W-4, the IRS offers a worksheet to help you calculate your personal allowances. On this form, you’re directed to enter “1” for yourself, your spouse and the number of children you have. This worksheet is geared toward getting you as close to even at tax time as possible. But some people prefer to have more taken out of each check so they get a hefty refund in mid-April. They can then use that money for vacations or special purchases. To have more taken out, they simply enter fewer numbers on their W-4.
But to have more money in your pocket with each paycheck, you’ll need to bulk up that number as much as possible. Although this won’t eliminate the taxes taken out of your check completely, you’ll see more of the amount deposited into your account on payday. Unfortunately, though, this move will come back to haunt you in April when you file your taxes and find out just how much of that money you owe.
Updating Your W-4
You likely completed your W-4 when you started your job, but you can update it anytime. Depending on your employer’s policies, though, you may not see immediate results. In larger companies with overtasked human resources teams, you may see several pay periods pass by before your withholdings change. Even in smaller businesses, your request may not appear on the next paycheck you receive.
If you’ve changed your withholdings due to temporary life issues, though, it’s important to change things back as quickly as you can. When you have money taken out below the recommended withholdings for your short-term life situation, you’re building up a debt that you’ll have to pay at tax time. Don’t be shy about taking your W-4 form back to your employer a couple of months later and asking to make another change.
Not paying taxes for six months or less is far easier if you’re self-employed. The truth is, if you work on an independent contractor basis, your clients don’t take a dime out to pay taxes. Yet at tax time, you’ll owe income taxes and a self-employment tax. This is 15.3 percent of your earnings – 12.4 percent for Social Security and 2.9 percent for Medicare – and it counts up to $128,400 of your earnings. If you make $50,000 in the tax year and pay no taxes, you can count on at least owing $7,650 on April 15, plus penalties.
The IRS expects self-employed taxpayers to pay their taxes throughout the year. If you use a tax preparer or software, you’ll be given an estimate of what to pay each quarter based on what you paid in taxes in the most recent tax year. These payments are due in April, June, September and January, but you won’t be sent a letter if you choose to skip a payment or two. You could easily skip June’s payment and pay double in September to make up for it. As long as you don’t owe $1,000 or more in taxes at the end of the year, you won’t be penalized. However, the IRS does caution that late quarterly payments could result in penalties, so you may see a small penalty anyway.
Understanding Part-Year Withholding
For employees who don’t work 52 weeks a year, part-year tax withholding is an option. This has employers taking extra taxes out during the period the employee is working to make up for the time throughout the year that he’ll be off. A worker who goes full-time in the summer but spends the rest of the year in school, for instance, may have an employer take taxes out as though that employee’s salary is annual, not just for the summer.
Employees who work only part of the year in a job may find tax withholdings become a little complicated. With the Tax Cuts and Jobs Act, though, the IRS is cautioning part-year employees to check their withholdings. This is because even a small change on a withholding for an employee who works only part of the year can have a huge impact. This could especially affect you as a part-year employee if you opt to make a change to your withholdings to have a little more to take home during the time you’re working.
Understanding Tax-Exempt Paychecks
Taking time off from paying taxes is not the same as being tax exempt, though. An employee with a tax-exempt paycheck has met the IRS qualifications for being tax-free. Taxpayers can claim exemption from paying taxes during a tax year if both of the following apply:
- She had no tax liability in the previous year and had a right to a refund of all tax due.
- In the current year, she will owe no taxes because she has no tax liability.
It’s important to note that the exemption only applies to income taxes, not Social Security or Medicare taxes. Those taxes will still be withdrawn. Claiming exemption from income taxes throughout the year is not the same as requesting taxes stop being withheld for personal reasons for a period of time.
Understanding Tax Consequences
There have been plenty of stories about people going to jail for not paying taxes. Generally, those violators are business owners or independent contractors who were responsible for reporting what they earned, rather than workers whose employers handle it for them. By the time a taxpayer sees criminal charges filed, that person has had ample notice that taxes were due. The IRS makes every effort to get its money. Even when those attempts are unsuccessful, though, you’re more likely to see your bank account levied or wages garnished than find yourself behind bars.
But even with all of that, you likely won’t see legal action based on skipping a couple of quarterly payments or changing your withholdings for a while. At most, you’ll see penalties and even then, they’ll be minimal. You may even find that changing your withholdings does nothing more than prevent you from getting a refund check at the end of the year. Instead of handing extra money over for the IRS to hold and return in the spring, you’ll be able to earn interest on that money yourself.
Failure to Pay Taxes Due
The biggest problems come at tax time when you’re given an amount to pay and can’t afford it. If you’re told you owe $5,000 due to your reduced withholdings during the year, you may find that you simply don’t have enough in the bank to pay it. In that case, the IRS urges you to file anyway. Failure to file comes with a much harsher penalty than failing to pay, so if you file now and pay later, you’ll be able to at least reduce the amount you’ll owe. The failure-to-file penalty is 5 percent of the amount you owe for every month your taxes are late. Once you reach 25 percent, the penalty levels off. If you file more than 60 days late, you’ll also face a penalty of $135 or 100 percent of the taxes due, whichever is less.
The failure-to-pay penalty is much more reasonable, even if it takes you a few months. You’ll pay 0.5 percent on your unpaid taxes every month, topping out at 25 percent. But the IRS will also charge interest on your unpaid taxes, which is the federal short-term rate plus 3 percent. This can add up over time, but there are things you can do to work with the IRS, especially if you have a hardship.
Negotiating With the IRS
Working with the IRS on a payment plan is the best option if you don’t foresee a windfall in the near future. You’ll have to qualify, but the good news is that you can kick off the process online. Go to the IRS’s Apply for a Payment Plan page and apply. There are two options for paying your taxes in installments. One is a long-term installment agreement, which requires that you owe $50,000 or less, and the other is a short-term payment plan, which requires that you owe $100,000 or less. The long-term agreement comes with a $31 setup fee plus accrued penalties and interest. The short-term plan is free to set up but adds on penalties and interest. Short-term plans must be repaid within 120 days. It’s also important to note that the $31 setup fee for the long-term agreement only applies if you agree to have the payments automatically withdrawn. Otherwise, you’ll pay $149.
For taxpayers going through a hardship, the IRS has an Offer in Compromise option available to those who are up-to-date on all tax filings. You’ll have to meet the IRS’s qualifications and make a proposal for how much you’ll pay, but if you're approved, you’ll be able to offer the IRS a smaller amount than you owe. When you make your offer, you’ll have two options. The first is to submit an initial lump-sum payment equal to 20 percent of the initial offer amount. If your offer is then accepted, you’ll receive written notice. The other option is to offer to pay in monthly installments and send the first installment with your offer. You’ll continue to send monthly payments until you get word from the IRS that your offer has either been accepted or declined.
- IRS: IRS Withholding Calculator
- IRS: Form W-4 (2018)
- CNBC: Tax Day comes with an extra task for the self-employed
- IRS: Estimated Taxes
- SmartAsset: What to Know About Part-Year Tax Withholding
- IRS: Seasonal, Part-year Workers Urged to Check Tax Withholding Amount
- Business ASAP: When Does an Employee Qualify as Exempt From Withholding?
- FindLaw: Can You Go to Jail for Not Paying Taxes?
- CNBC: Here's what happens if you don't pay your taxes
- IRS: Apply Online for a Payment Plan
- IRS: Offer in Compromise
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.