For a business owner, filing a tax return can be challenging enough, but being able to pay those taxes is another matter altogether. There are steps you can take if you're unable to pay your tax bill in full because of your financial situation.
Tax filing poses a challenge to many of us, but even more daunting is the inability to pay your taxes in due time. Due to a number of constraints, it may be impossible to pay your taxes. However, by deferring payment, you can push or schedule the payment for a later time. How can you defer tax payments? Let's consider a few steps.
Why would you want to defer your tax payment?
Every business in the US is required to file taxes, regardless of size or industry. The specific tax requirements for your business will depend on its structure as well as its income, profits, and other factors.
However, filing on time may not always be possible. Sometimes, business owners find themselves in a difficult financial position, affecting their ability to pay taxes.
You may encounter financial difficulties if you:
- Have trouble meeting sales targets due to low product demand
- Are reorganizing your internal processes
- Are paying off your bank loans
- Have spent too much on advertising
Small businesses already operate on a tight budget, and any financial disruption can have a big impact on their bottom line.
How do you defer your tax payment?
IRS has online systems and processes to defer your tax payment, so you can apply on your own in some situations. Even so, most businesses will benefit from the guidance of a tax professional, especially those with unfiled taxes for more than one year, or those with large tax bills.
An experienced specialist can help you achieve the best possible outcome in every situation.
Consequences of Deferring Your Tax Payment
In some circumstances, deferring tax payments might be beneficial for your business, but it comes with its own set of consequences.
As a result of delaying your tax payments instead of paying by the deadline, you have to make this payment along with the other tax bills due this year.
As a result, your cash flow may be disrupted more than usual this year. Due to this, it's essential that you know how to budget your money effectively to avoid any further cash flow problems, unexpected or otherwise.
Options for Deferring Your Tax Payment
Payment Plans and Scheduling
A payment schedule is an arrangement with the IRS to pay outstanding taxes on installments. The option is open to individuals and businesses.
In a payment plan, or installment agreement, the IRS determines when the outstanding taxes will be paid in full.
Individuals and businesses can use payment plans. You can apply for a payment plan as an individual if you file as a sole proprietor or independent contractor.
Monthly Installment Agreement
The monthly installment agreement is an arrangement to pay a tax bill over some months if you need time to settle it. Usually, a setup fee is incurred, alongside continued increasing penalty fee and interest. The monthly installment is paid either manually or through direct debit.
The Manual Installment Agreements requires that you send checks to the IRS each month until the completion of your payment. However, the fees for the manual option are slightly higher than the Direct Debit Installment Agreement. For the Direct Debit Installment Agreement, the IRS deducts the payment monthly directly from your account. There are perks of using direct debit as it's slightly cheaper than the manual payment option. The IRS cuts the tax penalty charge by half for direct debit.
To take advantage of any of the two options, you must assess your cash flow, assets, and liabilities, then use the evaluation to deduce how much you'll be paying monthly. You may wish to speak to a tax specialist to assess your business and IRS guidelines, then help you negotiate the smallest acceptable amount.
Temporary Delayed Collection
The temporarily delayed collection enables you to stop paying taxes for a while if your financial situation is bad enough that it is affecting your basic living. The payment resumes when there is improvement financially. The IRS suspends tax collection but not the interest and penalties.
To use this option, a list of all assets, bank statements, income, and expenses of the business will be required to ascertain your eligibility. You can request this using the 433-H or 433-A. Usually, a good record and bookkeeping are essential.
120 Day Tax Defer
The 120-day tax defer is an option that helps people unable to pay their taxes in full. Within 120 days the payment must be made. While there are no fees charged, the interest and other penalties continue to count and accumulate until the repayment is complete.
By using the Online Payment Agreement, or reaching out to the IRS, you can apply for the 120-day tax defer. The little clause is that only individuals (sole proprietorship) and independent contractors can take advantage of these tax payment options.
Offer in Compromise
Offer in compromise allows you to negotiate tax bill reduction with the IRS. The IRS will review a couple of factors to determine your ability to pay. If granted a compromise, you can pay a tax bill at a smaller amount. IRS uses an online tool to verify your eligibility. It verifies if you've filed and paid all current tax, and federal tax deposits if you are a business with employees.
With some exceptions for low-income earners, the application fee costs a little over $200 alongside a lump sum as an initial payment on outstanding tax liability. It's recommended you use a tax specialist as it can be a complex process. In the end, you either get to pay in lump sums over 5 months or spread it over a year( monthly basis). Note that your offer may be rejected, although, you may re-apply within 30 days of the rejected application.
Professional Tax Deferral
When it pertains to business taxes, a professional tax agent is best. The process of settling and deferring tax payment for a business is intricate and quite too complex for someone without experience.
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As you look to defer tax payments due to financial constraints, do well to use any of the options examined above. While you can execute some of the processes, some may require the help of a professional. Keep in mind that not all of the options are guaranteed automatic approval. You may need to re-apply for some after a rejected application.