Underpayment of taxes? Anyone go through this?

[inneedofhelp]

I worked a full-time and a part-time job as well as my own private business last year (only $180 in earnings from the business).

Even though I had an extra $200 withheld from each paycheck for the part-time business, and I claim 1 on my i-94, I still owe around $700 for california taxes and am freaking out because I never owed taxes before AND, I am a bit broke.

I could go into my emergency savings of $2,000 to pay the taxes, but that scares me as it is all I have, with the exception of a small 403b and a small amount of high interest (24%) credit availability.

Does anyone know what the penalty will be? I can make monthly payments of around $25-$50...which would eat up any leftover money AND keep me firmly at $100 a month for food---all while working on paying down my debt.

Would it be extreme for this amount of taxes owed? Does it make me more likely to be audited?

[inneedofhelp]

I have started looking for a part-time job, but am also hesitant because 1) i get super worn out physically, 2) have a great full-time job, just a lot of debt and 3) jobs are scarce and some people are living off of part-time work only.

[pikey412]

Due to a raise over the summer and my failure to re-adjust my quarterly tax estimations, I owe +$7000 come April 15.

[DebbieL]

I'm no expert on the American tax system, but here in Canada, Canada Revenue Agency puts pretty steep penalties and interest on overdue taxes. If the IRS is the same, it would likely be in your best interest to just pay it off (since you have the savings). I would then look to replenish the emergency fund as soon as possible.

[inneedofhelp]

So, I feel odd about the whole thing. On one hand, I feel super stressed out and just wanted to go home and take a nap, and another part of me feels like this too shall pass, and i will just have to adjust my spending habits.

I may sound like a whiner, but I buy something most days of the week----a 1 dollar iced tea here, some coffee there, maybe a new pen....so now I am going to have to really, really, really stick to buying a majority of my food and all of my necessities at the beginning of the month and just making do if I am broke for the rest of the month.

[zetta]

From California's tax site:
If I pay my taxes late, what interest and penalties will I be charged?

An underpayment penalty will be charged when taxes are not paid by the due date. The penalty is 5 percent of the unpaid tax as of the due date plus 1/2 of 1 percent each month, or part of a month the tax remains unpaid, not to exceed 40 months. The maximum penalty is 25 percent of the total unpaid tax.

So if you can't pay in full on April 15, you'd owe at least $35. Worst case, if it takes you many months to pay it off, you'd owe an extra $175.

I found this site that explains how to apply for an installment plan for CA taxes:
Individual Electronic Installment Agreement

The minimum is $25/mo, and you must pay in full within 3 years.

[inneedofhelp]

thank you for the link!!

I am going to try and pay as much of it as I can out of my own pocket, and then a friend will lend me money at a lower interest rate for the remainder so I can pay it off totally when I file my taxes.

[MonkeyMama]

That's great.

I was going to say current interest rate is low. If you annualize the penalty and add the current interest rate (which has no cap), it would be like paying a 11% loan. This is now. Interest rate is 5% now. It was just 8% like last year. So it could go much higher. The penalty amounts to an additional annual 6% interest. You have to decide then if you would rather pay 11%+ interest or not.

But in your case - glad you found a solution.

Non payment should not increase your odds of audit - just FYI.

[inneedofhelp]

thank you! wow! at 11% interest, it does make more sense to just reduce my savings than pay so much interest. My friend agreed to a contract of 1-3% for the loan.