Filing for a tax extension has the reputation of being a last resort solution that’s frowned upon; however, it is an option for a very good reason. Maybe you are behind on your bookkeeping, a big project snuck up on you or you’re still figuring out what expenses you can claim for the past year. No matter your reasoning, filing an extension is a simple, easy way to give yourself more time.
There are some added benefits, too. When tax season comes four times a year (like it does for freelancers), there may be situations where your accountant will even recommend filing for an extension.
When to File an Extension
This year was the first time that I filed for an extension on my federal and state income taxes. When my accountant mentioned the option to me, he said that a whopping 25 percent of his clients will likely choose to file an extension rather than meet the April 17 deadline. That’s not just the case with my accountant. In 2015, 21.5 million people waited until the last week to file their tax returns, and almost 13 million people filed for a six-month extension.
If you’re getting close to the deadline and you haven’t touched your taxes, consider filing for an extension instead. Because of self-employment tax and other complications, filing taxes as a freelancer is more complicated than it is when you’re someone’s employee. You want to leave more than enough time to do a thorough job, especially because there’s a chance you could be audited.
Let’s say you already paid off your tax liability through quarterly taxes. You still need to fill out Form 4868 and file a formal extension by April 17. The same is true if you haven’t paid off your tax liability over the year through quarterly taxes. This form still requires that you know your estimated tax liability, so you’ll have to estimate your revenue, expenses and income. If you don’t work directly with an accountant or a bookkeeper, there are online tax services that can help you calculate taxes owed.
Here’s the most important thing about filing an extension: You’re still liable for the taxes you owe by the original deadline. Always pay your estimated amount by the April 17 deadline. It’s okay if you need to adjust the amount slightly after you file the return. Anything extra you pay can go towards your quarterly taxes the following year.
Unfortunately, some freelancers need to extend their tax season because they’re caught off guard by the amount they owe the government. If you don’t pay your tax liability by April, you’ll have to pay interest on the money owed and risk getting penalized with a late fee. When that’s the case, pay as much as you can by April 17, and pay off the rest of your taxes ASAP — even if that means paring down your income for a few months. Next year, create a process for setting revenue aside for quarterly tax payments.
File Your Return by October 17
Filing an extension gives you six extra months to officially file your taxes. Believe it or not, a lot of people leave the final step until the last week (again). I recommend diving into the process during a slow month. For me, August is always quiet as people step away from the office and take vacations. If you work with an accountant, it’s easy to get their full attention during that time, too — they won’t be slammed with other clients during the summer months.
The most important thing to remember when you file an extension on your taxes is to follow through. An extension gives you more time, but it doesn’t erase the importance of getting your taxes done. Plan ahead and build the time into your schedule to get this done sooner rather than later. Maybe next year we’ll all be a little bit more organized when tax season rolls around.