If you have a traditional job and depend on your yearly federal income tax refund to pay off debt or splurge a bit, you may be shocked to discover the tables have turned this year and you’re the one who needs to pay up.
As Tax Day approaches, the IRS reports the number of people receiving tax refund checks is down 3%, with many taxpayers owing thousands of dollars for the first time.
If you’re an experienced freelancer, this is probably nothing new: you either pay quarterly estimated taxes or set aside a little every month to be paid at year end. That’s one reason side hustle veterans track their income carefully: to avoid preventable stress on April 15.
For workers in traditional jobs, Tax Day 2019 is a taste of freelance life, in which you learn you can’t rely on the people who write your paychecks to do your tax planning.
It’s happening this year because the IRS’s standard tax withholding suggestions were revised so that wage-earners kept a little more of their earnings in each paycheck instead of overpaying a little all year.
Add to that the 2018 changes in what is deductible and what is not and wage-earners who didn’t over-withhold on purpose didn’t finish the year with a cushion.
If this is you, you’re not alone and there’s no need to panic, even if you don’t have cash on hand to pay your tax bill. Below are several straightforward options you can take to ensure you pay the IRS with minimal stress.
First, File a Return
Even if you don’t have the funds necessary to pay your tax bill, you should still file a return.
In fact, Riley Adams, a CPA who writes the Young and the Invested financial blog for young investors says, “The worst thing you can do is ignore filing your tax return. Doing so can result in a failure-to-file penalty from the IRS.”
Adams went on to explain that, “You’ll be charged 5% of your unpaid taxes for every month the return is filed late, up to 25% of the balance you owe to the IRS in taxes.”
If you have questions about this, you can call the IRS at 1-800-829-1040 or read this IRS article that further explains what to do if you can’t pay your taxes.
If you’re still not convinced that you need to file a return, Ben Martinek a fee-only financial planner and founder of Bona Fide Finance, reminds us that “The IRS has incredible collection authority. They can garnish your wages without a court order, a typical stumbling block for most creditors.”
So, eventually, the IRS will get what’s owed to them. However, if you work with them and are proactive, you can come to an agreement that doesn’t involve garnished wages. Below are some examples.
Request an Extension
If you can’t pay your taxes, but believe you can come up with the money soon, the first step is to request an extension. According to Adams, “Doing so will delay the due date and result in more time for you to prepare your tax return.” He said, “If the IRS grants an extension, the latest this can delay filing your 2018 return is until October 15, 2019, unless you live outside of the country.” The form to file an extension is Form 4868.
Apply for a Payment Plan
Another option is to apply for a payment plan. It might be tempting to pay for your tax bill with a credit card, a personal loan, or money borrowed from Mom and Dad. However, there is a low-interest way to work it out directly with the tax collector.
“If you can’t afford to pay your tax bill by the due date, consider filing Form 9465, called the Installment Agreement Request,” counsels Adams, He explained, “This allows the taxpayer to set up installment payments with the IRS.” Additionally, according to Adams, “Pursuing this route avoids needing to put money on a high cost credit card or other form of expensive financing. In 2018, the IRS is required to allow this agreement if you owe $50,000 or less.”
Eric Nisall, a CPA who specializes in working with freelancers, agrees. He said, “It is always better to pay something as opposed to nothing as it shows good faith.” He did caution that, “Depending on the length and type of plan, you may have to pay a set-up fee and you will still be charged penalties plus interest, although the penalties are reduced during the payment plan period.” So, be sure to take the total cost of the payment plan into account if you’re considering this option.
Budget Your Money
If you’re approved for a payment plan with the IRS, you’re adding a new line item to your budget. Although you can work with the IRS to create a payment plan you can afford, it’s still important to do a thorough check of your expenses.
Monitor your spending to ensure you always make your IRS payments on time. Again, if you fail to pay the IRS, they will eventually get what’s owed to them. So, it’s far better to be proactive and make sure you’re on time. This might mean giving up short term fun like restaurant spending and concerts in exchange for a little financial responsibility.
Lastly, be sure to consult with an accountant or financial planner to ensure you have the proper amount withheld from your paychecks next year. If you’re a self-employed contractor, this is even more important. Save a portion of your paycheck in a separate account marked “taxes” to ensure you have cash on hand when taxes are due.
If you can’t pay your tax bill, it’s important to work towards a solution and not ignore the problem. If you don’t file a return, the IRS will eventually get what’s owed one way or another. So, it’s better to file a return and work with your accountant or the IRS directly to work out a repayment schedule. Then, take the necessary steps to ensure you’re prepared and have enough saved to pay your taxes next year.