Having a root canal. Stepping on a rusty nail. Getting a misspelled tattoo. Owing the IRS.
These are things everyone wants to avoid, and not necessarily in that order. Are those around you crowing about spending their big tax return, while you’re staring at a four, or gulp, five digit tax bill?
If this happens to you, the last thing you need to do is stick your head in the sand. Take action now and decide how you’re going to pay tax debt IRS.
Why Would You Owe?
There’s a wide variety of reasons why a person ends up owing federal income taxes at the end of the year.
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Withholding too little from each paycheck. If you work for an employer, you choose the number of dependents to claim on Form W-4. The greater number of dependents (including yourself) you claim, the smaller the amount of money taken out of every paycheck. This sounds tempting, because who doesn’t want more money every month? However, you may end up paying for it at the end with a hefty tax bill you can’t handle.
Address this by: Call Accounting immediately and ask for more of your paycheck to be withheld. This won’t help your current situation, but it will decrease the chances of it happening again.
Landing a big pay increase. Woohoo! You’ve secured a fat raise, or negotiated a bonus. If this happened last year it could be the reason why you’re in tax trouble now. Pay raises can push you into the next tax bracket and your withholding may not keep up. You may end up owing thousands of dollars more than you did the previous year.
Address this by: Talk to your CPA anytime you get a raise and ask for a recommendation on handling your taxes. The sooner you do this and make the adjustments after the change in pay, the better off you’ll be at tax time.
Acquiring income where taxes aren’t withheld. If you sell a stock and make a significant profit, the IRS is going to want its share.
Address this by: Sock away a portion of your windfall to handle the taxes that are sure to come from this type of income. Yes, we know that isn’t fun. But neither is a monstrous tax bill.
Participating in the “gig economy”. Many employees have a side hustle that may include ride share, freelance, or pet sitting. If you’re making extra money this way and aren’t paying taxes on the income, you may end up with an ugly surprise from the IRS.
Address this by: Set up a separate saving account and proactively sock away a percentage of your earnings for tax purposes. Your CPA can advise you of the amount based on how much you’re making, and other factors.
If you’re self-employed, you might get into tax trouble by…
Miscalculating your self-employment tax. Self-employed individuals must typically pay a greater percentage of taxes, since they cover all their tax burden without the help of an employer. This means your tax bill can grow bigger, faster than a regular employee’s.
Address this by: Meet with your CPA and explain the situation. Follow her advice to the letter on how much and when to pay your taxes. You may need to consider making quarterly payments.
NOTE: Even if you can’t pay your tax bill, it’s essential that you go ahead and file on time to avoid a late-filing penalty, which amounts to 5% of what you owe for every month you’re late. (Example: If you owe $10k and are 2 months late filing, that’s an extra $1000 you will owe). Failing to pay the IRS can have disastrous consequences. If you don’t address the issue and take action to pay, the IRS may begin collection proceedings. This could include putting a federal tax lien on everything you own, seizing your assets to satisfy your balance, and taking funds from your bank account, retirement account, or a portion of your paycheck.
What Should You Do If You Can’t Pay the Taxes Owed?
Whatever the reason, if you’re facing an IRS tax bill that you can’t pay, address it immediately. Ignoring it only makes matters worse.
Here are some ways to pay your tax bill in full.
Sell some stuff. Have a cool guitar, beautiful diamond, or pristine antique? Put it on the market. Use online ads and social media groups to find buyers, and earmark every penny to go toward your tax bill.
Raid your savings. Hopefully you’ve regularly contributed to your savings account and can access the total amount of the tax bill. This may hurt, but it’s better to take care of the issue and get it off your mind so you can move forward free and clear, without the extra tax penalties for non-payment.
Borrow the money. If a friend or family member is willing to loan you the money, take them up on it. If not, talk with your bank about a home equity line of credit (HELOC) or a short-term personal loan. Lenders will typically let you set up small monthly payments until the balance is paid off.
Put it on your credit card. Incurring credit card debt isn’t the best financial move, but it beats owing the IRS. If none of the above options are workable, pay the IRS with your credit card. If you go this route, try to use a card with a low rate of interest.
Set up payments with the IRS. If all else fails, work out a payment plan with the IRS. They currently offer a short-term plan and a long-term plan. With a short-term plan, you need to be able to pay off the entire debt within a 120 day period. There’s no up-front fee to set up a short-term plan. The long-term plan is for you if it will take you longer than 120 days. There is a set-up fee for the long-term plan.
NOTE: Regardless of the option you choose, if you work out a payment plan with the IRS, you’re going to be subject to penalties.
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Using an IRS payment plan to pay your tax bill should be the last resort because you continue to accrue monthly penalties and interest even if you’re meeting the agreed upon payments. These charges make it harder to finally get your bill paid in full.
Nobody wants to owe the IRS, especially if they don’t have the money to pay the bill on time. If this happens to you, first take action so that you’re never in this situation again. Then consult your CPA to talk about your options. Finally, try to find a way to pay that doesn’t involve making payments to the IRS.
Owing taxes you can’t pay calls for immediate financial adjustments. Cut spending and postpone big purchases so you can put as much of your income as possible toward clearing your tax debt. When you reach a zero balance, you can be free to go back to your previous budget.
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