As a business owner, you probably already know that you’re responsible for paying your taxes every year.
That doesn’t mean you’ll always be prepared to do so. Considering how difficult it is to establish preliminary funding for a small business, there are many reasons why business owners might find they don’t have enough money to cover what they owe.
It’s important to know that you do have options if this happens. Yes, your main goal should be to avoid this problem in the first place, but it can occur even despite your best efforts. The following are options to consider if it does.
Check for Accuracy
Don’t assume the IRS always gets it right. It is possible you don’t actually owe as much as they claim. Coordinate with a qualified CPA to review your taxes and determine if there are any errors.
Consider Different Ways to Cover Your Debt
It’s a good idea to cover as much of your tax debt as possible right away. While you might not have enough cash in the bank to cover the full amount, your business may have assets you can sell to make up the difference.
Of course, you don’t want to sacrifice any essential assets without exploring other tax payment options first. That said, there may be ways to come up with the money you need that you simply hadn’t thought of.
File Your Taxes
It’s easy to stress out when you know you won’t be able to cover your taxes, but don’t let that prevent you from filing a return at all. The IRS imposes penalties on businesses that don’t file returns. In the long run, you’re much better off doing your taxes and then finding out what steps you can take next. The IRS will be more inclined to work with you if you’ve taken all the necessary steps.
Ask for A Short-Term Extension
The IRS may be willing to grant you a 120-day extension if you can’t pay your taxes right away. This is an option worth considering if you genuinely know you’ll be able to gather the necessary funds within 120 days. If you’re not certain this is the case, you may qualify for a similar payment option.
Request an Installment Agreement
If 120 days isn’t enough time for you to pay all you owe in taxes, you can request a long-term installment agreement with the IRS. This involves paying back a portion of your taxes each month until you cover your entire debt. However, it’s important to know that such plans typically involve interest charges. You’ll also have to pay the filing fee, and may need to provide more information about your financials to the IRS if you owe greater than $50,000.
Don’t let that discourage you from pursuing this option. When you don’t have enough funds or assets to pay off what you owe, seeking a payment plan is much smarter than incurring late fees for nonpayment.
Pay with a Credit Card
You probably don’t need to be warned about the risks involved in paying your business taxes off with a credit card. If you’re unable to pay back what you spend in a timely manner, you could end up putting yourself in even more debt.
That’s not to say this isn’t a viable option worth keeping in mind. If you’re generally a financially responsible business owner, and simply found yourself unable to pay this year’s business taxes due to understandable factors, a credit card can help you avoid interest and late fees.
Ask Friends & Family for Help
This is another option you should only pursue if you’re absolutely sure you’ll be able to pay back a loan on time. Asking family or friends for money can put unnecessary strain on a relationship if you don’t pay back your loan according to an agreed upon schedule.
However, when you’ve exhausted other options, turning to others for help may genuinely be a good idea. Just make sure you spend time discussing how and when you’ll pay back the loan before reaching an agreement. You need to make sure everyone involved is on the same page in order to avoid disputes later on.
Borrow Against Your 401(k)
Do you have funds saved in a 401(k) account? Obviously, they’re supposed to be retirement savings, but they could also be used to pay tax debt when other options aren’t available.
That said, you’re limited to borrowing no more than 50% of the balance, or $50,000, whichever is higher. You’ll also need to pay back the loan within five years. This involves paying interest.
Reach an Offer in Compromise
Sometimes the IRS is willing to let taxpayers cover their debt for less than what they truly owe. This is called an Offer in Compromise.
Of course, you need to meet certain criteria in order to qualify for such a deal. That includes having filed all returns, made all required estimated tax payments, and in the case of a business with employees, made up to the current quarter’s required federal tax deposits.
The IRS will also consider certain factors when determining whether an Offer in Compromise is warranted. For example, the IRS tends to make these deals when, due to a taxpayer’s limited income and assets, it’s clear that collecting the full amount they owe simply isn’t possible. If the IRS decides you will be able to pay the full amount via another means, an Offer in Compromise probably won’t be granted.
It’s important to keep in mind that you want to maintain as healthy a relationship with the IRS as possible. Yes, there are options you can take advantage of when you’re unable to pay your business taxes, but don’t assume they’ll always be available to you. It’s still important to carefully review your financial history to determine why you found yourself in these circumstances. By identifying what mistakes you made in the past, you’ll be better equipped to avoid them in the future.
The above are simply a variety of ways you can address your immediate tax burden in the meantime. Remember, it’s important not to panic when you can’t pay your business taxes, but it’s also important to deal with the problem sooner rather than later. These circumstances don’t have to slow your business down at all. You can still succeed this year if you take appropriate action.