Divorce is messy for everyone, but if you’re a woman who owns a business or operates a sole proprietor, the IRS can make things even messier. When filing your taxes in the year of your divorce or the year after divorce, there are a few things you may not hear about, even from your tax accountant. In this article, I’ll share a few tips based on my personal experience in hopes that it may save other divorced mom business owners a few hassles and some emotional anguish. I’m not a tax accountant (though I did hold a CPA and have a basic understanding of financial matters), and you may want to consult a tax professional for your specific circumstances.
A little context: I’m a writer and consultant, and I operate as a sole proprietor (self-employed individual). That means I file a Schedule C with my federal tax return. I am also the primary breadwinner in my family, and so my filing status is head of household (not single). You can read more about my specific experiences with the IRS in a this post about “the tax man.”
Here are my tips. The first two apply to all divorcing women, but the rest are geared specifically for women business owners.
- Filing status if your divorce was finalized this year (2014): Make sure you understand how you are filing your taxes for 2013 if your divorce was not finalized until 2014. If you were still legally married on December 31, 2013, you can file as a married couple which often has tax advantages. Your settlement agreement should specify, but if you’re not sure, coordinate with your former husband to avoid downstream issues with the IRS.
- Filing status if your divorce was finalized last year (2013): If your divorce was final in 2013, you will likely be filing taxes on your own. Make sure you understand any special provisions in your settlement agreement for the year in which you divorced. The settlement agreement should specify how taxes are to be handled and who gets deductions for the children, but it’s best to be clear.
- Planning for estimated taxes. If you relied on withholdings from your former husband’s paycheck to cover your tax liability, begin filing estimated quarterly (or more frequent for higher revenue businesses) tax payments in 2014. The best way to do this is to take a percentage of revenue every time you receive payment (or every week for small dollar value, high volume businesses) and set it aside in a specific tax payment account. That way the money will be there when you need to pay it to the IRS and your state. I take 25% of every payment I receive, which has typically worked out so that I either owe a small amount at the end of the year or receive a small refund. The percentage you need to withhold will vary based on your income level, filing status, and other factors, so you’ll need to monitor and adjust each year or consult your tax professional.
- Paying estimated taxes. Most sole proprietors and small businesses pay estimated taxes quarterly. Both the IRS and most State Departments of Revenue now allow you to make these payments online. You can set up an account for your business with the IRS through their Electronic Federal Tax Payment System here. You’ll have to search for your specific State e-filing web page as the specifics vary considerably from one state to the next.
- Applying estimated taxes already paid. Here’s an area where I had unexpected problems. even though I used a tax professional in the year I got divorced. I had been paying in estimated taxes for my business, but when I filed my first tax return under my Social Security Number (SSN), the IRS did not recognize the taxes already paid and said I owed them a large amount of money. (You can read that story here). As it turned out, the IRS stored my estimated tax payments under my former husband’s SSN, not mine, because we had filed jointly when we were married. Whoever’s SSN is listed first on the tax form is how the records are filed, and in our case his SSN was the first one listed on the 1040 (federal tax form). So when I filed taxes under my own SSN, the IRS did not apply those payments to my account. It was quite a process to straighten things out, although eventually we resolved the issue satisfactorily. As far as I can tell, there is no way to notify the IRS in advance about this situation, so don’t be alarmed if you get a notice after filing if you similar circumstances. Be prepared to explain, provide documentation, and have a lot of patience.
- Filing your taxes. You may already have a bookkeeper or tax accountant handling some of these areas for you. If not, consider a low cost product like Turbo Tax for Home and Business (about $80 at amazon.com) to walk you through the process and calculate your estimated taxes for the next calendar year. I’ve used Turbo Tax even in years when I’ve had a tax professional prepare my return as a cross-check and to keep informed and get an initial idea of my tax status.
- Dealing with problems after the fact (IRS notices, audits, etc.). If the IRS systems find any discrepancies between what you file and what their systems show, such as the situation I described in #5 above, you will get an official notice. These are generated automatically by their systems and generally tell you that you owe them money and give you instructions on how and when to pay and what happens when you don’t. They are unsettling, scary, and sometimes maddening. But don’t panic. It can take some time, but the IRS is not out to get you. They require explanation and documentation (sometimes more than once), but it is possible to address misunderstanding and correct your records on your own or with professional help. The keys that worked for me are:
- Keep good records.
- Enlist help if you need it – your tax preparer, accountant, or a supportive friend or family member with some experience in taxes can help you determine next steps.
- Help the IRS understand the issue; make it easy for them to resolve in your favor.
- Keep good notes about who you speak with at the IRS and what they tell you. Be polite and courteous, but don’t give up.
- If you don’t get anywhere, contact your taxpayer advocate. You can find your taxpayer advocate at here or by calling 1-877-777-4778 or TTY/TTD: 1-800-829-4059.