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.
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.
What Can the IRS Do When You Owe Money?
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. 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. Your property could be a boat, car, or 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.
Owing the IRS: Here’s What You Can Do
While all of these scenarios are terrifying, there are things you can do. Here are the top ways you can handle your tax debt.
1. Deal with it Head On
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.
The first instinct may be to avoid it and hope that it will go away. It won’t, so you 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.
2. Installment Agreement
When you contact the IRS, you can offer to pay your taxes in installments. Let’s say you find yourself owing the IRS $1500.
You know that you can pay $100 a month for 15 months. You can negotiate with the IRS to have this installment plan approved. You do have to pay what you agree to on time.
If you don’t the IRS will end the agreement and collect on the full amount you owe.
3. Partial Payment Plan
A partial payment is different than installments because you’re paying a lump sum upfront. For example, you owe $3000 in taxes. You can do a partial payment for $2000 and pay off the balance in installments.
4. Offer in Compromise
If you have a lot of tax debt that you just want to wipe out and get a fresh start, this is a good way to do it. What this does is allow you to pay the IRS less than what you owe.
Keep in mind that it’s a long and difficult process to get these approved. You also have to qualify for this option.
5. Not Collectible Due to Hardship
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.
If you are in a position where you can’t pay anything towards back taxes, you can ask the IRS to stop collections efforts against you.
This is called putting your account in “Not Collectable” status. The IRS can stop collections efforts for a couple of months or a year.
6. Get Tax Help
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. Most of these people have seen just about every tax situation and can guide you in the right direction.
Learn from Your Lessons
Navigating taxes when you’re self-employed is tough. Sure there are a lot of perks because you can write off business expenses.
You’re also 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.
People that work for a company only pay half of these percentages. The other half is picked up by their employer. At a minimum, you should expect to pay this much in taxes.
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 $1000 in taxes.
Once you get an estimate from your attorney, be sure to set aside that money into a separate savings account every time you get paid.
Get Ahead of Your Taxes Before It’s Too Late
Dealing with taxes is never fun. When you find yourself owing the IRS a lot of money, it can be overwhelming.
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.