How to Handle an Unexpected Tax Bill
/Wait, what? How did your tax bill get that high?
Is your tax bill from the IRS larger than expected? After the shock wears off, the next feeling may be to panic.
First things first, take a deep breath. You have some options. Here’s how you may be able to reduce it or figure out how to pay it without harming your financial health.
Reduce your tax bill by amending your return
If you’ve already filed your taxes with the IRS, the only way you can go back and make your tax bill smaller is by amending your return.
Amending your return doesn’t result in any penalties. However, it takes extra work, and increases the time the IRS needs to process your return (and send you a refund, if you qualify.)
It’s always worth reviewing your tax return because you have made some mistakes that caused the bill to be higher than you expected. For instance:
Forgetting to write off a major deduction like rent. Click here to read the most common deductions for freelancers.
Failing to deduct employee expenses
Not carrying forward tax credits from previous years
Going back and correcting any of those mistakes could reduce your tax liability.
If you didn’t make a mistake, you may still be able to go back and retroactively make tax moves that save you money. For instance:
Opting for itemized deductions, rather than the standard deduction
Changing how you report deductions—for instance, whether you deduct your vehicle mileage per mile or by a percentage of use
If you’re a multi-member LLC, electing one filing status that is taxed less than another
If you’re going back over your already-filed return, and planning to file an amendment, get help from a tax professional. After looking at your books, they can answer any pressing questions you may have.
Paying off a giant tax bill
If after looking at your return with a professional and amending your return to shave down your liability, your tax bill is still more than you can pay, here are some options.
When you can’t afford to pay your taxes, the worst thing you can do is avoid the IRS. Every day you avoid the problem, you’re losing precious time. Once the payment deadline goes whooshing by, you’ll start paying percentage points on any money you owe the IRS.
You’ve got four options when it comes to paying down your massive bill.
1.Set up an installment plan with the IRS
An installment plan lets you pay down your tax debt gradually, in bite-size chunks. You qualify for an installment plan if:
You owe $10,000 or less in taxes, and
You can prove you can’t pay the amount you owe now, and
You can pay off the tax in three years or less
To qualify for an installment plan, file IRS Form 9465. Filing online saves you money—it lowers the installment user fee.
2. Make an offer in compromise
An offer in compromise is negotiation with the IRS.. Be sure to talk to an Enrolled Agent, tax attorney or CPA before taking this route.
3. Take out a business loan or get a line of credit
This option only makes sense if you can qualify for a loan or line of credit that has an APR lower than what the IRS charges in penalty fees. The interest that the IRS charges varies from year to year. Check the interest rate and run the numbers before taking out a loan or a line of credit to make your tax bill.
Before signing up to borrow, put together a plan to pay off your debt. It may accrue less interest than unpaid taxes, but it’s still a drain on your bank account, and you should try to eliminate that debt ASAP.
4. Ask friends or family for a loan
If you’re in a position to ask your network for help, reach out to them. Owing money on your taxes may feel embarrassing, but you will get through it.
How to avoid unexpected tax bills in the future
Once you’ve handled this year’s bill, it’s time to take steps so that you’re never left scrambling again. Here’s what you can do to avoid big, unexpected tax bills in the future.
1.Set aside enough for quarterly estimated payments
The general rule of thumb is to set aside 30% of your self-employed revenue for taxes.
When you work for someone else as an employee, they automatically withhold income tax, as well as Social Security payments. When you work for yourself, it’s up to you to withhold that amount.
Set aside roughly one-third of your income every time a client pays you, or at the end of every month in your high-yield savings account. By tax time, you’ll be glad you did.
2. Itemize deductions
Opting for a standard deduction makes filing your own taxes easier. But you could be missing out on tax savings.
As your business gets bigger and begins to incur more expenses, you’ll qualify for more tax deductions. Itemizing them and deducting each could lower your tax liability more than the standard deduction would.
Be sure to chat with a certified tax professional—they can help you crunch the numbers and figure out which deduction is right for you.
3. Keep your books organized
Organized bookkeeping, like Bench, lets you track every single eligible deduction. It also lets you create projections for your business—so you can plan how to pay down your tax bill, whether that’s with a loan or via an IRS installment plan.
4. Stay on top of tax law changes
When you keep an eye on changes in tax law, you avoid nasty surprises.
For instance, in 2018, the Tax Cuts and Jobs Act reduced or eliminated entertainment and staff meal deductions, helping to increase the tax bill for many businesses.
At the same time, it reduced corporate taxes across the board, opening up new ways to save on taxes for business for businesses willing to incorporate.
Tax code doesn’t make for the most thrilling read. But it affects how much you pay—and that affects your business.
5. Hire an accountant or tax advisor
Most accountants or tax advisors are willing to sit down with small business owners for a free consultation. During that consultation, they should be able to show you ways they can save you money on taxes.
Paying a tax professional to help you could be cheaper, in the long run, than footing a massive tax bill. Check out this article for tips on how to find a quality tax accountant.
6. Check out BenchTax
Bench is one of North America’s largest bookkeeping service. When you sign on with them, you’re assigned a team to do your bookkeeping for you, and an intuitive app to track your finances.
On top of that, you can add BenchTax to your plan. With BenchTax, your taxes get professionally filed every year, taking into account every possible deduction. That means less stress for you, and less likelihood of getting caught with an unexpected tax bill.
A giant tax bill is never a friendly sight, but if you get organized quickly, you can reduce it retroactively—or, worst case scenario, pay if off ASAP.
I love Bench because as a freelancer wearing all the hats in your business, it's great to work with a company that takes the guesswork out of personal accounting. Bench offers affordable, intuitive software and a team of bookkeepers ready to answer whatever questions you might have. Check them out to start a free trial or get 20% off your first 6 months. If you decide to work with them, I do receive a commission that helps me provide this awesome, free content to you.
About Money & Mimosas: Money & Mimosas was started as a passion project by Danetha. A former NFL cheerleader turned entrepreneur, she started blogging as a way to combine all of her passions into a career. Money & Mimosas is now enjoyed by readers in over fifty countries with the same dream of achieving financial freedom without living frugally.
