Taxes. They’re not the most exciting part of running a business, but they’re unavoidable. If tax season snuck up on you and you’re staring down a bill you can’t pay, don’t panic, we’ve got you covered!
In this episode, Danielle Hayden, CPA and founder of Kickstart Accounting, Inc., walks you through what to do when you can’t pay your IRS tax bill. From filing your return (even if you can’t pay right away) to exploring payment plan options, Danielle breaks it down with practical strategies to take control of your finances and stay out of trouble with the IRS.
Key Takeaways:
- Step 1 - Don’t Ignore the Problem: Avoiding your tax bill only makes things worse. The IRS can impose serious penalties, so taking action right away is crucial.
- Always File Your Tax Return, Even If You Can’t Pay in Full: The failure-to-file penalty is significantly higher than the failure-to-pay penalty. Filing on time helps minimize extra costs.
- Step 2 - Pay What You Can: Some payment is better than none. Put the amount of money towards the tax bill you can afford, and begin assessing the options available to you to pay the remaining balance.
- Step 3 - Evaluate Your Payment Options: The IRS offers short-term and long-term payment plans, often at lower interest rates than credit cards or loans.
- Weigh Your Financing Choices Carefully: Compare the IRS interest rate (around 8%) with other options like credit cards or personal loans to determine the most cost-effective way to pay your tax bill.
- Bonus Tips:
- Plan Ahead to Avoid Future Tax Surprises: Set aside money regularly for taxes, pay estimated taxes quarterly, and use financial statements to track your tax liability.
- Have a "Money Team": Having a trusted bookkeeper and tax accountant working together can help you stay ahead of tax season and avoid stressful surprises.
Topics Discussed:
Why You Shouldn’t Ignore Your Tax Bill (00:02:08 – 00:03:06)
Filing Your Tax Return vs. Waiting Until You Can Pay (00:02:36 – 00:06:43)
IRS Payment Plans and Evaluating All Financing Options (00:07:36 - 00:08:04)
Smart Strategies to Avoid This Situation in the Future (00:08:04 – 00:11:17)
The Importance of a "Money Team" (aka a bookkeeper and tax accountant) (00:11:17 – 00:12:15)
Resources:
All Our Episodes & Articles on Taxes | Tackle Your Taxes with Kickstart Accounting, Inc.
KSA Tax Partners | https://ksataxpartners.com/
Free Gift | ‘How Much to Pay Yourself as a Business Owner’ Calculator
Book a Call with Kickstart Accounting, Inc.:
https://kickstartaccountinginc.com/book
Connect with Kickstart Accounting, Inc.:
Instagram | https://www.instagram.com/Kickstartaccounting
YouTube | https://www.youtube.com/@businessbythebooks
Facebook | https://www.facebook.com/kickstartaccountinginc
Episode Transcript
00:00:00:00 - 00:00:24:15
Danielle Hayden
Welcome to Business by the Books, the podcast that helps you understand your financials so you can confidently manage and grow your business. I'm your host, Daniel Hayden, CPA and founder of Kickstart Accounting, Inc., where we use bookkeeping as a tool to empower business owners like you take control of your numbers. Over the past decade, I've helped thousands of entrepreneurs make informed financial decisions.
00:00:24:17 - 00:00:49:22
Danielle Hayden
And today, we're tackling a tough but common topic. What do we do when you can't pay your IRS tax bill? By the end of this episode, you'll have a clear game plan for handling your tax bill, whether that means going on a payment plan, tapping into savings, or preparing smarter for next year. So let's dive in. First of all, let me just say, I get it.
00:00:50:00 - 00:01:17:18
Danielle Hayden
You had a great year. Business was booming and saving for taxes was just not top of mind. Maybe you took that well-deserved vacation, attended some conferences, or reinvested in your business with some new equipment. It happens to the best of us. Seriously. Over the years, I've worked with so many clients who have fallen into this common trap. Sometimes business seasonality also throws us off.
00:01:17:19 - 00:01:42:20
Danielle Hayden
Oh my goodness, when you crush it in quarter four but then hit a slow patch in quarter one, it creates a monster cash flow issue and it's just in time for tax season. It's perfect. No one hands us a guidebook on how to plan for taxes when we start a business. Navigating the IRS is seriously nobody's dream job except for my amazing team.
00:01:42:22 - 00:02:07:21
Danielle Hayden
And that's why we're here every week: to give you the tools you need to navigate these challenges like the CEO that you are. So I get it. You started your business because you love your craft. And this tax stuff sneaks right up on you. All right, here's the deal, it's what you do now that really actually matters. So let's talk about what steps to take.
00:02:08:01 - 00:02:36:01
Danielle Hayden
Step one. Seriously, you guys, listen to me. Don't ignore the problem. Burying your head in the sand will only make things worse. Ignoring your tax bill can lead to the IRS taking drastic measures. They can seize your bank accounts, wages, property. The sooner you act, the less painful this process will be. And honestly, the less costly it will be.
00:02:36:02 - 00:03:06:13
Danielle Hayden
We have to file your taxes no matter what. Even if you can't pay right away, file your tax return. Waiting or avoiding filing will trigger a failure to file penalty, which adds 5% of your unpaid taxes for every month your return is late. Compare that to the failure to pay penalty, which is just 0.5% per month. The bottom line here, filing is always the better option.
00:03:06:14 - 00:03:26:22
Danielle Hayden
Pay what you can, even if you can't pay the bill. And for the next step, we have to start to evaluate our options. We're not burying our head in the sand. We're taking responsibility. We filed our return. We paid what we can. Now we need to evaluate how to handle the remaining balance. I want you to start with your business.
00:03:27:00 - 00:03:50:10
Danielle Hayden
Assess how much your business can contribute to paying the tax bill with the existing cash and future profits of the business. So we want to start with the business, especially if the tax bill was created from your business. Once we have looked at what the business can pay to the cash bill over the next several months, I want you to consider your personal savings.
00:03:50:12 - 00:04:33:04
Danielle Hayden
While it's best for the business taxes to be paid with the business funds, you might explore your personal resources. You might have savings, a family loan, a line of credit. Ultimately, we need to weigh the costs. Compare the IRS interest rate currently around 8%, compounding daily with the other financing and savings options. I had a client who recently told me that their American Express bill was 28.8% interest per month, and they chose to take the money out of their savings account to pay their tax bill rather than paying off the American Express.
00:04:33:06 - 00:05:04:07
Danielle Hayden
Now they have an American Express bill that is compounding at 28% interest, and they use their savings account to pay the IRS bill rather than filing their taxes, paying what they could pay today, and coordinating with the IRS for a payment plan that exists around 8%. We can use data to weigh the costs and evaluate our options. The goal of today's episode is to help you understand that there are other options out there.
00:05:04:09 - 00:05:30:10
Danielle Hayden
I get it, the IRS is scary. I don't want to mess around with them either, you guys. However, I want you to be educated to know what your rights and your responsibilities are. So if paying the full balance isn't feasible, the IRS offers several payment options. You could do a short-term payment plan that's under 120 days with a very low setup fee.
00:05:30:12 - 00:06:01:07
Danielle Hayden
You could also do long-term payment plans. These are monthly payment options that will exist for longer than 120 days. There are also hardship or compromise arrangements that you can only qualify for if you and or your business is truly in a hardship. Now, the short-term payment plans currently today are $0 to set up. However, you will continue to accrue penalties and interest until the balance is paid in full.
00:06:01:09 - 00:06:28:12
Danielle Hayden
The long-term payment plan has a $22 setup fee, but you will continue to accrue penalties and interest until the full balance is paid. So again, we're weighing that interest rate against our other options that we have available to ourselves personally. Now the most important part here is to take actions. I want you to avoid having future problems.
00:06:28:13 - 00:06:43:11
Danielle Hayden
So again, step one we are taking our head out of the sand. We are not going to ignore this problem. We are filing our taxes no matter what. File your return. Pay what you can.
00:06:43:13 - 00:07:05:20
Aubrey Philipp
Real quick. Are you struggling with tax deductions or how much to pay yourself as a business owner? Get the ‘How Much to Pay Yourself as a Business Owner’ calculator and the guide to the ‘6 Tax Tips Every Business Owner Should Know’. Go to KickstartAccountingInc.com/gift to simplify your financials today. Okay, back to the show.
00:07:05:22 - 00:07:36:08
Danielle Hayden
Step three, evaluate your options, your personal situation, your savings and other funding options that you have available. Make a decision and then contact the IRS. It is a very simple payment plan that you can apply for online. You want to coordinate with the IRS as soon as possible. The IRS might take the time to get back to you, especially if you have a larger balance due.
00:07:36:09 - 00:08:04:18
Danielle Hayden
And remember, you are going to continue to accrue penalties and interest until it's paid in full. You can always pay the IRS in the mean time. So even if you have applied for a short-term or long-term payment plan, but you have funds available, you can continue to make payments to your amount due for that return. While you're waiting to be approved, how do we avoid this from happening in the future?
00:08:04:23 - 00:08:27:02
Danielle Hayden
I joke, my mom always said growing up that there's two things guaranteed in life: we're going to pay taxes and we're going to die. I laugh every time that it's ironic I became an accountant. We know that we are going to be paying taxes every single year. We need to start talking about prevention. Here at Kickstart Accounting, Inc., we help our clients stay ahead of tax season.
00:08:27:05 - 00:08:58:11
Danielle Hayden
We send our clients their financial statements and their CEO dashboard called the Snapshot every single month. In the Snapshot, we are showing our clients exactly how much to save for taxes. Here's what we see that happens, your CPA has given you the estimate of taxes that you need to pay according to your previous year's return. You are required to pay your estimated taxes, but that is based on last year's profits.
00:08:58:13 - 00:09:28:12
Danielle Hayden
What we see with our clients is that our clients are killing it. They are doing so well year after year. Their profits are growing. Hello, when our business does better, when our business grows, we owe more in taxes, you guys. It is part of doing well. So as your business grows, as your profits are growing, you need to know how much to save for taxes over and above what you're required to pay in your estimated taxes.
00:09:28:14 - 00:09:55:06
Danielle Hayden
So check out your financial statements and your CEO dashboard, the Snapshot, to see exactly how much you need to be saving over and above your estimated taxes. Step two is to pay those estimated taxes, you guys, quarterly. This is a requirement and it ensures that you're staying on top of your obligations. Your business is going to continue to grow, and we need to pay those estimated tax payments quarterly.
00:09:55:09 - 00:10:22:23
Danielle Hayden
Set up that tax reserve. I recommend opening up a separate savings account. This account is dedicated only to taxes. That way the funds are ready when you need them. So when you receive your Snapshot, you're going to see your tax reserve. From that tax reserve amount, you will pay your estimated taxes. Whatever that leftover amount is, we need to transfer that money into a savings account.
00:10:23:01 - 00:10:53:05
Danielle Hayden
You can pay that money to the IRS. However, I prefer to keep that money in a savings account where I have the benefit of those dollars growing in a high interest savings account. This is your choice. In no way is today's episode a way of offering you tax guidance or telling you how to handle the IRS. However, I wanted to take a moment to shed light and educate you on your options as a business owner.
00:10:53:06 - 00:11:17:09
Danielle Hayden
I hear way too many of our clients not taking advantage of the short-term and long-term payment plans available under the IRS. Compare the IRS payment plans to the other funding opportunities that you have available to you. As your business encounters these tax bills, remember, you're not alone in this, and with a clear plan, you can tackle this tax bill.
00:11:17:09 - 00:11:52:15
Danielle Hayden
Every business owner needs to have a money team. That's why here at Kickstart, we help our clients with their bookkeeping and their taxes. We know how important it is to have a money team who's working together in your best interest. As your business grows and your business is booming, how amazing would it be if your bookkeeping team could talk to your tax team and coordinate for you behind the scenes to help you make sure that you are staying compliant and ready for taxes?
00:11:52:17 - 00:12:15:19
Danielle Hayden
So you need a money team, both a bookkeeper and or a tax accountant. I invite you to come to KickstartAccountingInc.com, book a call. Our team would love to be a resource for you. We are currently accepting clients for both bookkeeping and tax services. Remember, you've got this. I believe in you. Thank you for tuning in to this week's Business by the Books!
00:12:15:19 - 00:12:48:20
Danielle Hayden
Don't forget to hit like and subscribe! We love hearing from you. Until next time, keep thriving!