Owing the IRS can cause a lot of stress in your life. There’s worry of the unknown, a lot of letters reminding you of how much you owe, and a deadline to pay, especially if you discover you owe a larger-than-expected IRS bill.
It’s even harder for a self-employed person. You have to make money for your business, but it feels like you’re just getting by, and you have to pay the self-employment tax at a minimum. You don’t save enough and you find that you’re way behind on your taxes.
What do you do when you owe taxes? You do have options available to you. Read on to discover what they are.
As a taxpayer, it’s essential to understand your tax obligations to avoid penalties, fines, and interest on unpaid taxes. The Internal Revenue Service (IRS) offers various resources to help you navigate the tax system and meet your federal, state, and local tax obligations. Whether you’re an individual or a business owner, knowing what you owe and when you owe it can save you from financial headaches down the line. The IRS website is a treasure trove of information, providing guides, forms, and tools to help you stay compliant with tax laws.
Federal taxes are a critical component of your tax obligations, and they’re what you’ll pay to the IRS. The IRS requires individuals and businesses to file tax returns and pay taxes on their income, employment, and other sources of revenue. This includes income tax, payroll taxes, and self-employment taxes.
Understanding your federal tax responsibilities can help you avoid tax debt and ensure compliance with tax laws. For instance, if you’re self-employed, you need to pay both the employer and employee portions of Social Security and Medicare taxes. Keeping track of these responsibilities and filing your tax returns on time can prevent late payment penalties and interest charges.
When you start getting letters from the IRS, your mind can easily go into a tailspin. Can you get arrested? Can they take your car? Can the IRS take your home? Can they close your business?
The IRS has a lengthy collections process that starts as soon as you file taxes. In an ideal world, you pay right away when you file. But if you don’t, things get prickly. Over a period of months, you’ll get letters from the IRS. Unless some kind of action is taken on your part, these letters will get progressively worse.
The IRS has a right to seize your assets. They can place a federal tax lien on your property. This property could include a boat, car, or even your home. With a lien, the IRS is claiming a right to that property and will notify your creditors of that right.
They can also place a levy on your assets. This is a bit broader because your assets can include property and income. They can also place a bank levy on your bank accounts and retirement income. With a levy, they’re saying that they’re going to seize your property.
Can they take your business? It depends. If you’re a sole proprietor or a single-member LLC, your business and personal income are the same. They could take your business assets because they’re the same as your personal assets.
If your business is a corporation and you get your income from that corporation, then they’re treated as two separate entities. The IRS could seize your personal assets, but not your business assets.
While all of these scenarios are terrifying, there are things you can do. Here are the top ways you can handle your tax debt.
Remember that the IRS doesn’t want to take your assets or destroy your life. They’ll only get that far if you do absolutely nothing with the letter you get in the mail.
Your first instinct might be to avoid it and hope that the problem will go away. It won’t, so you’d better pick up the phone.
You’ll need to deal with your situation and speak directly to the IRS. They’ll let you know what your options are and how you can get out of tax debt.
When you contact the IRS, you can offer to pay your taxes in installments. Let’s say you find yourself owing the IRS a tax balance of $1,500. You may not have $1,500 to spare.
But let’s say that you do know you can pay $100 a month for 15 months. You can negotiate with the IRS to have this installment plan approved. If they agree to the installments, it’s your job to pay the agreed upon amount on time.
If you don’t, the IRS will end the agreement and collect on the full amount you owe on their terms.
A partial payment is different than installments because you’re paying a lump sum upfront to cover part of the taxes owed. For example, let’s say you owe $3,000 in taxes. You can do a partial payment for $2,000 and pay off the remaining balance in installments.
This option works well if you have some cash on hand but not the full balance for your tax due. It also helps you feel like the debt hanging over your head is smaller, too, which some find reassuring.
If you have a lot of tax debt that you just want to wipe out and get a fresh start, an offer in compromise can be a good way to do it. This strategy actually allows you to pay the IRS less than what you owe.
Keep in mind that it’s a long and difficult process to get these requests approved. You also have to qualify for this option; if the IRS feels that you can actually feasibly pay using another method, your offer in compromise won’t be approved. Low income taxpayers may have a better chance of qualifying for an offer in compromise.
As a self-employed individual, you really don’t have a safety net. It’s not like you can collect unemployment if a client cancels a contract, so your income suffers until you find another client. And when times are tough, the next client might not be right around the corner.
If you’re in a position where you can’t pay anything towards back taxes because of hardships like this (and others), you can ask the IRS to stop collections efforts against you.
This is called putting your account in “Not Collectable” status. While this status is in place, the IRS can stop collections efforts for a couple of months or a year. Your debt remains in place, and you’ll still need to pay it after the “Not Collectable” status ends. But the calls will stop for a while, giving you some time to get back on your feet without feeling like the IRS is breathing down your neck.
You’re not a tax expert. You may call the IRS a few times and find that you get different answers depending on who you talk to.
You definitely want to enlist the help of a tax expert who can help you through the complex world of self-employment taxes if you’re a business owner. These experts can also help navigate complicated business taxes and other complex tax issues specific to your situation. Most of these people have seen just about every tax situation and can guide you in the right direction.
Not only can a tax expert help you navigate your current tax debt, but they can help you avoid it altogether in the future. They’ll help you accurately estimate your tax liability for the year (including self-employment taxes and local taxes), set up estimated tax payments, and more.
Navigating taxes when you’re self-employed is tough. Sure, there are some perks, like writing off business expenses. But there are downsides, too. For one, you’re responsible for paying all of your taxes. For self-employed people, you have to pay a self-employment tax of 15.3%. That’s for Medicare and Social Security. In a “traditional” employment scenario, the employer pays half of these taxes while the employee pays the other half; self-employed individuals, including small business owners, pay the full amount themselves.
It’s wise to work with a CPA who can tell you what you can expect to pay in taxes. They’ll also set you up with estimated payments. These are quarterly payments you need to make if you’re going to owe the IRS more than $1,000 in taxes for the year.
Once you get an estimate from your tax attorney or CPA, be sure to set aside that money into a separate savings account every time you get paid. Miscalculating available funds in your bank account can lead to a rude awakening when tax time arrives, so it’s better to set those funds aside in advance.
Dealing with taxes is never fun. When you find yourself owing the IRS a lot of money, it can be overwhelming and even a little bit scary.
You do have options, but you have to step up and contact the IRS first. Let them know what your financial situation is, and work with a tax expert who can help you make the right decision.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Tax Information and Resources
Related Articles
7 IRS Audit Red Flags to Avoid
by Team ZenBusiness, on January 17, 2025
How to Avoid a Small Business Tax Audit
by Team ZenBusiness, on November 14, 2024
Helpful Tax Tips
by Team ZenBusiness, on December 04, 2024
Tax Liability: What You Need to Know
by Team ZenBusiness, on January 07, 2025
Tips for Managing Your Taxes as an Artist
by Team ZenBusiness, on November 25, 2024
Federal Small Business Taxes
Start Your LLC Today