Rigbooks recently talked to David Dilley, who’s been a CPA for more than 16 years and who specializes in trucking accounting and taxes. The following article is based on our talk with him. This article includes advice on what to do when owner-operators and small trucking companies run into problems paying taxes.
There are a few common mistakes that regularly result in financial and tax payment problems for owner-operators.
Losing track of income
One common mistake is missing or forgetting about a payment. This can happen when a 1099 gets lost in the mail or gets sent to an old address and that was the owner-operator’s only way of tracking their income. Or the owner-operator does track their income but just forgot to put in one payment. These cases of ‘under-reporting’ are fairly common across the board, which is why the IRS has a whole under-reporting unit; they match up 1099s with what people are claiming as income and make sure there aren’t discrepancies.
Getting noticed for under-reporting will sometimes be quite painful for an owner-operator. Trucking is such a low-margin profit business to begin with, even just a few extra hundred or few extra thousand dollars owed can be a big, unexpected hit.
(If you find that you often have trouble keeping track of your income and expenses, consider trying out some trucking software. Rigbooks currently is offering a free 30-day sample of their software..)
Under-estimating taxes owed
Another common mistake, especially for newer owner-operators, is under-estimating taxes owed. This happens a lot when truckers don’t make the recommended quarterly tax payments and are taken by surprise when they actually realize how much they owe. This is why quarterly tax payments are recommended; also because you get a late payment penalty for not doing the quarterly payments.
What percentage of revenue an owner-operator should be setting aside for taxes can vary widely, depending on how much a spouse makes, state-specific taxes and fees, depreciation changes, and other factors. The amount to set aside could be as low as 0% and as high as around 30%. It’s recommended to talk to a CPA or other expert every year to figure out how much to set aside.
If you send too much money, your tax accountant and the IRS will notice this and (barring a big mistake on their part) you will get that money back. So it’s better to make a mistake and err on the side of paying more than you owe rather than less, because making too-low payments can easily lead you into a false sense of security and a painful surprise later.
Mistakes in past filings
Sometimes small business owners will notice that their filing was done wrong; for example, forgetting to include some deductions. It’s not too late to file a correction for a previous year’s filing. Just contact a tax professional and talk with them about amending a previous year’s filing.
Not being able to pay
If you realize that you won’t be able to pay the full amount of the tax you owe, it’s still very important that you do file. Some people, especially sole proprietors, get scared when they realize they can’t pay, and just avoid the unpleasantness by not filing. This is a big mistake.
Not filing can lead the IRS to file for you, with a Substitute for Return (SFR) file. When they do this, the IRS doesn’t include deductions and you end up owing a lot more than you would otherwise. Also, there are penalties for “failure to file.”
The first thing you should do when you realize you won’t be able to pay is to confront it head on and contact a tax professional. The longer you avoid the issue, the more problems you will have down the road–problems like non-payment penalties and interest piling up. Unless you’re planning on running from your financial issues forever, you’d be best served by working with a professional and the IRS to see what you can do.
If you owe, pay it off as quickly as you can
If you owe a manageable amount, it is in your best interest to pay it off as quickly as possible. The longer you take to pay, the more interest and penalties will accrue.
As David Dilley, CPA, points out, “When you don’t pay the IRS, you are essentially taking a loan. And it’s not a good loan. You’d be better off borrowing money from somewhere else.”
One option the IRS gives you for relatively small amounts owed (less than $50,000) is to be put on a payment plan. These are typically structured over 72 months.
David recommends another option for making payments, and it’s one that he believes works better for many owner-operators. If you owe the IRS money, you can set up an account online at the Electronic Federal Tax Payment System (www.eftps.gov); this allows you to make payments whenever you want on top of your scheduled payments. David recommends making payments every week just based on how good or bad a week you had. If you had a really big week, make as big a payment as you can manage. If you had a low-income week, make a small payment.
What this does is prevent you from getting too at-ease and feeling like you have more money than you do. You want to pay off your debt as quickly as you can, as the longer you take to pay it off, the more you’re paying. This strategy works best for a lot of small business owners, David has found, because many may be lacking good money management skills.
Owing very large amounts
If you owe an amount that is unmanageable and that you couldn’t possibly pay off, then it’s very important to call up a professional tax consultant and start to work on the problem. The IRS has methods for negotiation and allows people to settle for payment amounts when it’s clear that the current amount owed could not reasonably be collected. Sometimes these negotiations allow people with immense amounts of debt to settle for a fraction of what they owe.
Your only alternative to tackling the problem head-on is to run from your financial problems, which is a path some people choose. David has worked with truckers who basically were “on the run” for years, ,moving from place to place, avoiding paying their taxes and scared of trying to come to terms with all the debt and problems they’d built up. But most of these guys eventually get to the point where they are sick of running and hiding, and they want to settle down and live a normal life.
That’s when they call someone like David, who puts himself between them and the IRS and tries to best serve their needs in getting them on a manageable payment plan.
If you do find yourself in a position of settling with the IRS for a lower amount, it’s very important to continue paying your taxes. If you lapse on paying your taxes, this can result in the IRS cancelling the settled amount and you owing the original, much higher amount.
Talk to a true professional
As we emphasized in the first article, it’s important to talk to someone who actually knows tax law, and especially one who knows about trucking and transportation aspects of tax law.
David says that he sees a lot of owner operators make mistakes on their taxes based on something a friend or “their wife’s dad’s barber’s neighbor” told them. It can be tempting to think that someone who tells us something we want to hear is correct, but you don’t want to play a guessing game with the IRS. Go online and post questions on trucking-related forums, or just call up for a quick consult with a tax professional.
Hopefully we’ve given you some helpful advice in the event you ever find yourself encountering some tax problems. Check back on our resource center for more helpful articles for owner-operators and small trucking companies.
If you have any questions about this article or want to learn more about how our software, Rigbooks, can help you with improving your fuel efficiency, send us a message on our Contact Page.
About David Dilley
We interviewed David Dilley, CPA, for this article. David is based in Jackson, Ohio and is the owner of the website TruckersTaxReturns.com. David graduated from Ohio University in 1995 with a Bachelor of Business Administration with majors in accounting and small business entrepreneurship. He became a CPA in 1999 and is a member of the American Institute of CPAs. He worked as an accountant and auditor for other CPA firms before going to work for a local transportation company in 2002. David launched his own CPA firm in September, 2008 and focuses on helping owner operators and small- to medium-size trucking companies lower their tax burdens.
My name is Jason Forrest, and I’m the creator of Rigbooks. Rigbooks is a cloud-based software that makes it easier for small and medium-sized trucking companies run their business while keeping organized. We’ve been around since 2010.
A little about me: I grew up in a trucking family and from an early age I learned about the day-to-day problems that truck owner/operators have to deal with. I was into computers and programming as a kid so over the years I helped write small computer programs that helped my parents run their company better. Eventually that led to the idea of putting all those tools together in one package. And Rigbooks was born.
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More resources for trucking business owners:
- What’s the difference between HVUT, Form 2290, and IFTA?
- "How long do I have to keep these?": FMCSA record retention for owner-operators and small fleet owners
- Top tax filing tips for owner-operators
- Tips for owner-operators with tax problems
- How are fuel surcharges calculated?
- Simple rules for maintaining long-term profitability in your trucking business
- Starting out with an owner-operator trucking business
- Owner-operator expenses: Fixed costs vs variable costs
- Understanding owner-operator expenses and costs
- Gaining half an MPG can put more money in your pocket than adding $90,000 in revenue
- Cutting fuel costs and improving fuel efficiency for Owner Operators
- Top truck-buying tips for owner-operators
- New versus used truck pros and cons table
- Buying a truck: Should you get a new or used rig?
- Preventative maintenance strategies to avoid major repair costs
- IFTA fuel-buying strategies: Where is the best place to buy fuel?
- Calculating your cost per mile
- Owner Operator Expenses - Fixed Costs vs Variable Costs
- How do I calculate IFTA?
- How does IFTA work?
- How did IFTA start?
- What exactly is IFTA?
- Tracking miles for IFTA
- Fitness for the road
- Acronym cheatsheet for the trucking industry