By Miranda Marquit
This story originally appeared in Planting Money Seeds.
How to prepare to pay taxes
Paying taxes is a year-round consideration. When you have a “real” job, that’s usually taken care of for you. If you are a business owner, you need to plan your tax strategy more carefully so you don’t wind up with an unexpected tax debt, and the biggest part of that is having a savings mechanism in place so that you don’t freak out when it looks like you might owe $18,000 to Uncle Sam.
Most home business owners like me know that they won’t be seeing tax refunds each year. And, for the most part, that’s ok. We get that all a tax refund means is that you’ve been giving the government an interest-free loan. But you need to balance that with the fact that underpaying by too much throughout the year can mean penalties. Make sure you make the required quarterly payments throughout the year to avoid steep penalties later.
Next, save up what you need. I automatically transfer a set amount from my checking account to a savings account designed for taxes each month. Most years, I use that money to make quarterly tax payments. I usually set aside enough to account for state taxes, plus a little extra, on top of my federal obligation. That way, if I owe more (and I usually do, although my new plan to make less than six figures could change that), I’m ready if there is an extra amount to pay.
What to do when you can’t pay taxes
If you do end up with an unexpected tax debt, you do have options. Perhaps the best option, if you owe less than $50,000, is to use the IRS installment plan. You’ll be charged interest, but compared to the interest and penalties that come from ignoring your tax debt, or compared to what a credit card issuer or another lender might charge you, it might not be a bad idea.
The IRS does accept credit cards, and you could get another loan, but the installment plan is often the best choice if you want to maintain liquidity and pay less in interest.
The worst thing you can do is ignore your mounting tax debt and/or fail to file your tax return. Ignoring the problem only makes it worse. If you aren’t sure how you will pay taxes this year, start looking into options like the IRS installment plan. Then, start an automatic plan to save up for taxes in the future. Being ready to pay taxes by planning ahead can keep your bill from destroying your business.