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How to File a Free Income Tax Extension

This article was written by Flexo in Taxes. 12 comments.

I finally provided my tax details to my accountant yesterday. As I expected, there won’t be enough time to work out the details before today’s tax filing deadline, so I’ll be filing extensions. In years past, when I filed for myself and my taxes were simpler, I usually waited until the last day. My procrastination has been helped by the availability of online filing. I’m thrilled to no longer need to run to the post office late at night on April 15. (This year, the deadline is April 17 due to a holiday in D.C.) In recent years, I could just as easily fill out the paperwork and file in my pajamas without leaving the house, even from the comfort of my own bed with a laptop computer.

The last few years, my taxes have grown more complicated, and my accountant now has me in the habit of filing an extension every year. This gives me six extra months to file my paperwork, a task getting increasingly complicated, having moved from an employee with only W-2 income, to a “part-time” self-employed individual with some income recorded on W-2 forms, some on 1099 forms, and some on no forms, to the sole owner of a business filing with an S-Corp status, with K-1 forms in addition to 1099s and W-2s, to an even more complicated situation in 2011.

Filing a federal extension for your personal taxes is free and simple. Before you get started, find your previous year’s final tax return (or just your adjusted gross income amount) to verify your identity with the IRS. Make sure you know your other personal information, like Social Security number, and have the information from your W-2 ready.

Step 1. Visit the IRS-sanctioned website, Free File Fillable Forms. Popular tax filing software programs also offer customers the ability to file for an extension. With the IRS-sanctioned website, you can be sure that the service will always be free and you won’t be distracted by advertisements for paid products. As of today, it’s free to file an extension using TurboTax, but there is no guarantee that this method will be free on the day you want to file your extension.

Step 2. Create your account. Whether you use the Free File Fillable Forms website (hereafter called “FFFF” for brevity) or commercial software, you’ll be required to create an account or login to an existing account. If you’re creating a new account, select a user name that will be easy to remember. With FFFF, you’ll have the opportunity to print your account username and password for reference.

Step 3. Select the appropriate form. With FFFF, you have the choice between forms 1040, 1040A, and 1040EZ. You’ll need to select the form that’s right for you. Form 1040 is the most comprehensive choice, so it is always safe. Depending on your situation, you may not be able to file your taxes using forms 1040A or 1040EZ. Keep in mind that you can still use TurboTax, H&R Block, or any other software to file your taxes before the extended deadline. Even if you file your extension using FFFF, you do not need to return to the IRS-sanctioned website to finalize your tax return. For example, I filed my extension via FFFF myself, but my accountant will be filing my tax return later this year using the method of his choosing. If you plan on finishing your return using some other method, just choose Form 1040 here by clicking the “Start 1040″ button.

Step 4. Complete your personal information. Begin by entering your information at the top of form 1040. Include just your name, address, and Social Security number. At the top right of the screen, there is a button labeled “EXT” that looks like the image included here. Click that button (on FFFF, not here).

Step 5. Estimate your tax liability. Here’s the problem with filing for an extension: the IRS won’t extend the deadline for paying any tax that you owe. Only the paperwork receives the extension. If you haven’t paid your full tax bill, you may owe money. You need to estimate how much total tax you owe for last year’s income. On the form, you will then subtract your total payments, including withholding from your job. To avoid having to pay any penalties, your total payments must be 100% of what you owe. I added up all the payments I made, included withholding from my former day job, the amount of last year’s overpayment that I applied to this year’s taxes, and the estimated payments. Since I paid more than my estimated total liability, I did not need to make a payment when filing for the extension.

Step 6. Complete the form. You’ll need to select a PIN, enter your birthday, and consent to the disclosure statement.

Step 7. Pay your tax liability. If you’ve determined in Step 7 that you need to pay when filing for an extension to avoid a penalty, you have a few options. You can print form 1040V and send a check to the IRS, or you can provide your tax filing service, whether FFFF or a private software company, with your banking information. The IRS will pull the amount you specify from your account electronically using direct debit.

Step 8. Submit your extension. Once all the information is complete, the “E-File Extension Now” button will be available at the top of the page if you’re using FFFF. With other software, you will be prompted to file your extension paperwork at the end of the process, though in some cases, you might need to pay a fee. You’ll receive responses through email twice. The first will come as soon as you submit your form to notify you that the extension has been submitted to the IRS. Within hours, if there is no problem with the information you entered, you should receive a second response to notify you that the IRS has accepted your extension paperwork and you will now have an extra six months to file your taxes.

Don’t forget to look into filing an extension for your state taxes as well. In New Jersey, where I live, this is easy. I do not need to file any paperwork in New Jersey for my personal extension. When the IRS grants an extension for federal tax returns, New Jersey will automatically allow the later deadline. If I didn’t pay enough state taxes throughout the year, I would need to pay the state when filing for the extension, just like I would need to with the federal tax extension. When I file my paperwork later this year, I can include a copy of my federal extension form and the state will not penalize me for filling late. Different states may operate differently, so always verify what you need to do before the initial tax filing deadline.

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S-Corporation Designation

This article was written by Flexo in Taxes. 10 comments.

Last year, I mentioned my accountant saved me $15,000 by re-classifying my self-employment income from a limited liability corporation (LLC) to an S-corporation. I glossed over the process; in fact, getting to the $15,000 in tax savings was a bit more complicated than simply filing as an S-corporation. I could likely have saved even more if it hadn’t been too late to re-classify prior years, as well, or if I had worked with an accountant from the beginning.

I’ll share some details now so that readers — those with self-employment income, whether from a blog or otherwise — can determine whether this is the right choice for them. Keep in mind I am not an accountant or tax professional. Always discuss your particular situation with a tax accountant who will help you come to the right decisions.

An S-corporation is a type of legal business entity that, like LLCs or partnerships, allow all income or losses from a business to be passed along to shareholders and included in personal income tax returns. The biggest benefit, unlike LLCs or partnerships, is that not all business income needs to be passed to the owners as salary or wages.

For example, if you are the only shareholder, you could assign yourself a reasonable salary. You would owe self-employment tax on only this salary, not on your full business income. The remainder of your business profit will still be added to your personal income. You will owe income taxes on the full profit of the business, but only owe additional self-employment tax on the amount you designate as salary.

There are a few disadvantages for filing your business taxes as an S-corporation. The amount of necessary paperwork increases. If you’re busy running your business, you may not have time to deal with this. I’m glad I have a tax accountant to advise me and handle the paperwork. Considering the amount of money I saved, he has been worth his fee.

Filing as an S-corporation may make you more vulnerable to IRS audits, so ensure you’ve fully documented your income and deductions.

To create an S-corporation, complete your state’s process for incorporation and acquire a federal tax identification number. If you’ve already incorporated, or if you’ve formed an LLC, you do not need to re-incorporate, but ensure your state’s rules for your entity type meet your needs. File IRS form 2553 to elect S-corporation status.

When you file your taxes each year, rather than completing the form 1040 Schedule C, use form 1120S and Schedule K-1. Form 1120S is due before personal income taxes, so ensure your documentation has been sent in, or your extension request has been filed, by March 15 every year. Don’t forget to check your state filing requirements, too.

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How My Accountant Saved Me $15,000

This article was written by Flexo in Taxes. 51 comments.

It seems I have paid the government more than what was necessary over the past few years. When I first started earning money outside of my primary employer in 2004 or 2005, I assumed it would make the most sense to simply claim that income as self-employment income on Schedule C of the standard 1040 income tax return. It wasn’t such a bad idea; there was not a lot of paperwork involved.

When my business was growing, I decided I should formally accept that I had a business, so I registered as a limited liability company (LLC) and received a employer identification number (EIN) from the federal government. I also registered with the State of New Jersey. Although the business was now formalized, I could file my income tax return using Schedule C. Single-owner LLCs can be considered sole proprietors, too, so I continued using simple paperwork.

A few months ago, I finally got around to meeting with the accountant who had been recommended to me by a friend who has owned his own business since 2000 and who has written guest articles for Consumerism Commentary twice. We talked quite a bit about my situation and my business and he recommended filing as an S-corporation rather than a sole proprietor.

The biggest benefit of the S-corporation is the ability to significantly reduce payroll taxes. From what I understand, as owner of the company, I would not need to take all income from the business as personal income every year. I can withdraw only what I need or want from the business account, use that amount for determining the income tax owed, and leave the rest alone.

By reclassifying my business in 2008 as an S-corporation, the accountant, who charges $500 per year’s return, was able to save me about $10,000 between federal and state taxes. I have not yet received the refunds, however, so my fingers remain crossed. Unfortunately, we could not reclassify the business to an S-corporation for 2007, but the accountant made some other business-related adjustments and we found about $5,000 more.

I received the first refund check from the State of New Jersey for my amended 2007 return yesterday. As long as the other checks come as expected, working with the accountant was very worthwhile.

Photo credit: jekert gwapo

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Personal Balance Sheet, October 2009

This article was written by Flexo in Monthly Update. 15 comments.

Although it’s a little late this month, it’s now time to share my personal finances. I’ve been doing this roughly every month since Consumerism Commentary started in July 2003. I did recently make one important change — I am no longer counting my “business” bank accounts in my net worth. I’m trying to separate my business, which consists mainly of Consumerism Commentary, from my personal accounts.

October was an interesting month. I traveled to my brother’s wedding in California, so there were a number of extraordinary expenses related to the event. I do have some good news, however. The IRS has approved the reclassification of my side business from a sole proprietor LLC to an S-Corporation. this should result in a refund of over $8,000 from my 2008 tax payments.

It could take a while to receive the refund, so I’m not planning anything for it yet, but it will most likely stay in a savings account for a while.

Here are the numbers. Read the full article →

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This Week in the Archives

by Flexo

I’m continuing a retrospective this entire year, to benefit new readers who may have missed these articles the first time around. Here is a taste of what you may have missed this week over the past few years. From January 22-31, 2006, a particularly productive week: * Introducing the MoneyBlogNetwork — yes, today is the ... Continue reading this article…

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Make Money With MySpace

by Flexo

I’ve mentioned previously my disdain for the social networking monster that is MySpace, but it turns out that it’s not just for kiddies and awful bands anymore. According to CNN, Some entrepreneurs are using MySpace to market their small businesses, and those who tailor their business to the MySpace clientelle are succeeding. I am starting ... Continue reading this article…

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