How to Pay Your Taxes

I’m an undisciplined mess when it comes to money. (I’m not so good with food either.)

Actually, I’m pretty disciplined when it comes to the spending part. If I have access to money, then I spend it. In fact, I’m an efficient, effective, and powerful spending machine. I like to buy things.

My son, who’s now 22, takes after me. When he was young, we joked that he could find something to buy in any store regardless of what they sold. It was true. Walk into a plumbing supply house, and he wanted to buy a toilet. Roofing supplies? He needed some shingles.

The problem with being a spender is that you end up short on cash when you need it.

The Moment of Reckoning: Tax Time

Paying my income taxes was a nightmare for me.

I earned the money. I spent the money. Then the IRS would request that I pay my tax bill.

Sadly, I’d already spent the money. I explained my predicament to the IRS, which nodded in an understanding manner yet insisted that I pay the tax bill.

I pushed back and tried harder to explain that the money was already spent. The IRS encouraged me to pay over time with interest. I decided that was a good plan when the agency explained that the alternative was to go to prison.

Thankfully, that was about the time that my accountant and tax lawyer decided we should turn our law firm entity into a C corporation. Back then, there were some advantages to being a C rather than an S corporation that related to health insurance expense deductibility.

When the switch took place, the corporation started withholding taxes from my paycheck. I no longer had to make quarterly estimated tax payments. I got paid every two weeks (still do, as we haven’t changed since the mid-1990s), and my taxes were automatically deducted. At the end of the year, my taxes were already paid as a result of the withholding. Boom. Problem solved. Prison avoided. Sweet.

Sadly, I am not alone in my spending/tax avoiding habits.

You Too Can Prevent Tax Angst

Over the years, I’ve talked to lots (maybe hundreds) of lawyers who have issues with tax payments. They’ve jumped in the same boat with me by getting behind on estimated tax payments. They decide to wait until the filing deadline to pay, and then they don’t have the funds. Then, when they pay over time, they’re getting hit with interest and penalties.

Has this ever happened to you?

If you’ve ever been in this situation, then maybe you’re more like me than you might want to accept. We’re the kind of folks who’ve always got a reason for our spending. We’re good at explaining how a special circumstance caused the problem and it’s not likely to repeat. Something “unexpected” always comes up.

Sadly, the situation happens over and over again to big spenders like us.

How can you avoid owing tax money to the government?

Clearly, I’m no expert. I have, however, worked it out for me. And I’ve figured out how to use the same system for other situations as well. I’ve figured out how to save for rainy days, college expenses, retirement, etc. You can do it too.

First, it’s important to acknowledge that we’re the kind of people who pay our bills. We pay our taxes. We’re not deadbeats. We’re just overspenders: that’s our problem. This is a problem a good psychologist could probably help us solve. But, in the meantime, we need to stay out of jail and/or bankruptcy court.

The financial experts have been telling us forever how to manage our money, but we’re too smart for them. We’ve got our own “systems.”

The experts say “pay yourself first.” They’re right. They also preach making our savings “automatic.” They’re right about that too.

The Solution to the Tax Quandary

There is no shortcut. There is no fancy, magic solution. There’s “pay yourself first” and there’s “automatic.” That’s the ticket.

I made it automatic by setting up the withholding. I did the same thing with automatic deductions for savings and other investments. It works. By making it automatic—and having it come straight out of my paycheck—I was also paying myself first.

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The best example of this system working—other than my tax withholding—is our mortgage payments. Many of us own homes and have the payment deducted automatically. It just happens, and many of the big spenders I know have accumulated substantial equity in their homes because they didn’t have access to the cash. The “pay yourself first” and “automatic” nature of the system created an asset for us. Of course, the home equity line craze wasn’t particularly good for our equity, but you get the idea.

You need to find a way to automate the process of setting aside the taxes and, once that’s under control, using the same system to automate your savings and investments. It’s a mental game, but it’s a mental game many of us need to play, or we’ll end up in the very difficult spot of failing to accumulate assets. You don’t want that to happen.

How to Set Up a System That Works for You

You’ll have to customize your system depending on your role in your business and the type of entity you’ve created, but there are lots of options. You can do it my way with the withholding and automatic deductions: that’s one approach. You can also empower your bookkeeper to set aside the funds without your direct involvement: that’s an alternative. You’re creative. You’ll come up with an approach that works for you.

The key to making this work is simple. Because you’re the kind of person who is responsible and pays your taxes—eventually—we know you’re going to get the bill paid. You’re simply late, which is causing you stress and costing you money. You need to stop being late. That’s a matter of changing your ideas about which deadlines are flexible. By mentally making the deadline “harder” and by automating the payment process, you’re moving the payment forward. The shift costs you nothing over the long haul and saves you tremendous amounts of accounting fees, interest, penalties, and stress.

Currently, you believe that the taxes are due when you’re forced to pay. Other people—the saving types—believe that taxes are due when the government first asks for them. You’re going to have to move up your timetable if you want to avoid the stress and penalties. You’re going to need to let the payments happen without your brain getting involved. Make it automatic.

It took me a while to get my tax bills under control. I had to get the spending decision-making out of my hands and over into the world of “automatic.”

When I get to April 15 now, I still remember the stress the date used to cause. I’m relieved to have it under control. More importantly, my wife feels the relief as well. We don’t always appreciate the stress we’re causing for others.

Make it automatic. Make sure you pay yourself first. The next thing you know, you’ll have your taxes paid, and your investment accounts will grow. It took me a while to figure it out. You can do it too.

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