This simple question would seem to have a simple answer, but like most things having to do with the IRS, it’s not as straightforward as you’d think.
For those living abroad, the simple answer often given is “Your taxes are not due until June 15,” but this is a half-truth. A person working out of the country on April 15 gets an automatic two-month extension to file their return, making it due on June 15. But this extension is for filing your return only, not for paying your taxes. And if you file your return by June 15 and you owe taxes, interest will have begun accruing on April 15. The same holds true even if you file for an extension using form 4868, which gives you until October 15 to file your return; any taxes owed are still due on April 15, so interest begins accruing on that day. Furthermore, if you do not file on time, you will be subject to the failure to file penalty.
A related issue that often affects missionaries is failure to withhold taxes during the tax year. Because many missionaries are self-employed, no employer withholds taxes for them. Some missionaries believe they can wait and pay their entire tax bill on April 15. While this can work for those with very small tax burdens (less than $1,000), it can cause missionaries to end up paying more, because they become subject to the underpayment of estimated taxes penalty. This happens because the US essentially has a pay-as-you-go tax system. Just as most people’s employers withhold taxes from each of their paychecks, those that are self-employed are supposed to file estimated taxes four times a year.
And that’s not the end of their potential tax liability. If they either have not paid 100 percent of the prior year’s taxes due, or 90 percent of the current year’s (depending on which is smaller), then the underpayment of taxes penalty can kick in. Because many missionaries rely on the June 15 automatic extension or the October 15 extension to file their returns, the underpayment of estimated tax penalty, plus the interest on the penalty and tax owed, can add up to some large and unexpected tax bills.
Unfortunately, I have seen some of these bills become large enough that missionaries had to leave the field, return to the US, and get a “real” job to pay for the past taxes.
Of course this is not a situation anyone wants to find themselves in and another reason it’s advisable to contact a tax professional who understands the extensions and associated penalties. If you are planning to be a self-employed missionary, make sure you understand the tax implications prior to leaving for the field.
Loren Gill is a tax preparer located in Orlando, Florida, and specializes in overseas missionary taxes. Learn more at missionarytax.com. They have prepared taxes for people in the mountains of Papua New Guinea, the deserts of Asia, the African savannah, and the Amazon jungle. Loren is the son of missionaries and grew up overseas. Later he and his wife served as missionaries in Bolivia, South America for six years. During this time he became aware of the complexities missionaries face when filing taxes. After serving in Bolivia he trained in tax preparation and worked for five years with New Tribes Mission, filing taxes for thousands of New Tribes missionaries. He then went on his own to be able to help missionaries in other organizations.
This post is provided by ECCU for educational purposes only. It is not intended to be tax or accounting advice. ECCU disclaims any liability arising out of your use of or any financial position taken in reliance on information provided in this post. Consult a tax professional concerning your own specific tax circumstances.