Tax Game Easily Lost in First Few Quarters

| April 02, 2002

Here’s the nightmare: You buy a brand new truck. For the first two years, thanks to your accountant’s aggressive use of depreciation, you pay no income tax. The third year – well, you don’t listen too closely when he suggests stashing something away for estimated quarterly tax payments now that depreciation benefits are exhausted. The fourth year, your friends at the Internal Revenue Service ask for $12,000 in taxes, penalties and interest for that third year of operation.

And you thought only maintenance expenses were getting out of hand.

One of the hardest disciplines for new owner-operators is paying estimated income taxes, federal and state. Payments are due April 15, June 15, Sept. 15 and Jan. 15.

What you owe each quarter is a fourth of last year’s tax bill or 90 percent of your estimated tax for the current year. The latter is too complicated to bother with, says Kevin Rutherford, owner of Whiteline Business and Financial Services in Florida, which serves owner-operators. “Pay 100 percent of last year’s tax, and you won’t be penalized,” he says, even if your income jumps dramatically.

As many as 80 percent of owner-operators ignore paying the quarterly tax, Rutherford estimates. They face not only one whopper of a tax bill, but also a half-percent per month penalty and 9 percent interest on the missed payments.

Unless you want the IRS to hold you by the ankles and shake out your pockets, you need a plan. Rutherford advises his clients to set up a money market account for quarterly taxes.

“They take that quarterly estimate, once the accountant tells them, and divide by 13 because there are 13 weeks in a quarter,” he says. Then they feed the money market account either by automatic draft from a checking account or by direct deposit of settlements – first into the tax account, the remainder into the checking account.

This way, “When it’s time to pay, they have it,” Rutherford says. The important thing is to make regular payments to the IRS, even if you’re a few days or a few weeks late.

Filing an appeal is a time-consuming hassle, he says. “For an owner-operator who’s on the road all the time, if you screw up, you might as well just pay the penalty.”

Your first 2002 payment is due next month. If you haven’t started saving, start now. Keep it up all year.

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