How to Succeed in Chapter 13 Bankruptcy by Paying Your Estimated Quarterly Income Taxes by the Pay Period

03 Sep How to Succeed in Chapter 13 Bankruptcy by Paying Your Estimated Quarterly Income Taxes by the Pay Period

Jonathan Ginsberg, an Atlanta lawyer who is a member of the Bankruptcy Law Network, and moderator of the theBKBlog Personal Bankruptcy Tips and Tricks, gives good advice to self-employed clients: set up a savings account for a tax escrow account. I go one step further and advise my chapter 13 bankruptcy clients to pay their estimated quarterly income taxes out of the savings account every pay period.

Clients who use my method of tax “escrow” have successfully stayed out of trouble with the tax authorities and the chapter 13 bankruptcy trustee. Clients say to me, “I didn’t know you could do that!” My response is: “sure you can.”

We figure out how often to pay taxes by how often you get paid. Rather than keeping the money in a savings account until the end of the three-month quarter, you pay the taxes at the end of each pay period. For example, a cosmetologist pays her booth rental and her taxes weekly and a newspaper carrier who gets a monthly check pays his taxes monthly.

Most tax preparers give you four payment vouchers for the next year with your tax return. It is as simple as dividing the amount to pay by three months or 13 weeks. You can pay the taxes by electronic withdrawal from the savings account or make copies of each voucher and send one in with each partial payment. Mark each check with the year and “estimated income tax.” You still fill out and send in the quarterly tax report with your last payment for the quarter.

If your income fluctuates, an accountant can help you figure out what percentage of your gross income should be deposited each pay period.

Paying estimated taxes by the week or the month forces you to live on your net income, not your gross receipts. You don’t have the illusion that you are making more money than you really are. The little bit of interest you lose by not having the money in a savings account for a month or two is far less than the penalties and interest for late tax payments.

You aren’t tempted to “borrow” from the escrow account to pay other expenses. You aren’t scrambling to come up with the money when it comes time to make the quarterly tax deposits. If your business is not profitable, you will know it sooner rather than later and, hopefully, before you dig yourself a deep hole of unpaid taxes that are not dischargeable in bankruptcy.

Do yourself a favor and pay your estimated quarterly income taxes by the pay period!

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Jill Michaux has helped Kansas consumers with debt problems for three decades. She and her partner, Mark Neis, are Topeka's only bankruptcy specialists, board certified in consumer bankruptcy law by the American Board of Certification. She help start the National Association of Consumer Bankruptcy Attorneys.
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