“My business had a much better year than I was expecting and the quarterly estimated payments I sent in weren’t even close to covering what I owe the IRS.”
“I just got into the freelance/self-employed/independent contractor world and was introduced to self-employment tax.”
Are you in a position where you’re unable to pay your full tax balance? It can feel like a pit-in-the-stomach moment staring at that tax balance and wondering how to deal with it. The good news is you’re not alone. In fact, it happens to plenty of business owners every year! There is a way through this and we have your back.
Here are a few things we tell our clients when they find themselves in this situation:
1. If you can swing it, pay off state taxes all at once. Most states don’t have a very easy system in place to get payment plans established. It usually involves underpaying them, responding to notices, phone calls… and who has the time and energy to deal with that? You’ve got a business to run! Besides, it’s mentally easier to deal with just one lagging balance than have two prior balances chasing you.
2. When we file your federal return, we’ll need to let the IRS know two things — how much you want to pay initially and how much you want to pay each month.
a) How much you can pay them upfront is usually a function of the cash you have available to throw at this (after having paid off the state). The more you can send the IRS now, the less of a balance you have that is accruing interest.
b) How much you can pay monthly usually starts with thinking about how much the financed balance is (eg if you owed $34,000, and paid $14,000 initially, you now have $20,000 to pay off) and then thinking about how long you want to take to pay it off. $20,000 spread over four years (48 payments) is about $417 a month before factoring in interest.
c) Then we always double-check that amount against what feels reasonable for your business / personal cash flow. Here’s why. We want you to take advantage of their automatic payments. We provide bank info, they debit your account on the date we choose every month. That way you never forget, never fall behind. So it should be something low enough that you feel comfortable setting it on autopilot–knowing that you can always send them some extra money if you have a good month and want to put a dent in the balance.
3. The interest on balances owed to the IRS is low–in the 3% range these days. So it’s definitely not that bad a place to be owing money if you have to. Certainly less expensive than racking up credit card debt. So if it’s between paying some of those other more expensive bills and more aggressively paying back the IRS, the government is where you want to hold the balance.
4. And if things go well and you want to move faster than your payment plan, no problem. There are no early repayment penalties. You can pay it back early anytime.
5. Last, but not least, we get to set all the terms of this plan, and as long as they meet some pretty loose criteria, it gets automatically approved. No lines, no phone calls, no forms. Show me another government process that works that smoothly… C’mon.
So there you have it! Our top-line strategy for how to approach paying off a surprising tax balance. It’s always tough staying current with your current-year tax liabilities as you start making payments on your past… it’s a challenge, but not impossible. You’ll want to stay current so you
don’t default on your agreement, and
don’t keep adding to the pile of taxes that have to be paid back.
There’s always a path through these situations and we’re here to help. Feeling unsure about your next steps? Let’s review your options and get some personalized guidance to help push you in the right direction!
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