Don't Panic! How a Tax Payment Plan Can Help Your Small Business

Paying taxes is an essential responsibility for small business owners. While most people think about income taxes, businesses have a variety of tax obligations, especially if they have employees. But what happens if you don't have the money to pay your taxes? Having a tax payment plan with the Internal Revenue Service is key to avoiding unnecessary interest charges, penalties, and fees that can make a bad situation worse. Learn how to pay taxes, where to get the money, and how to get help paying tax debt to keep your business current on its obligations and avoid liens on your assets.

Types of Tax Payments Small Business Owners Must Make

There are a variety of tax payments that business owners have to make throughout the year. While each state has its own tax obligations, Federal taxes are broken down into five main tax categories.

• Income tax. Taxes on the net income a business generates after deducting eligible tax deductions and tax credits. All businesses must file tax returns, but partnerships file informational returns.
• Estimated taxes. Employees have taxes withheld from their paychecks, but businesses don't follow this same process. They must pay estimated taxes throughout the year based on their projected tax bill.
• Self-employment tax. Social Security and Medicare taxes are split between the employer and employees. Entrepreneurs are responsible for both halves of these taxes on their income.
• Employment taxes. Business owners who have employees must pay taxes for Social Security, Medicare, and Federal unemployment tax (FUTA) on their employee wages. Separate tax forms are also due along with these payments.
• Excise tax. Certain businesses must pay excise taxes based on their work type, including manufacturing or selling certain products, using specific equipment, or offering applicable services.

Many taxpayers assign employees to prepare tax returns and calculate the balance due on their tax bill. Others outsource tax preparation to tax professionals or specialists, like a CPA, enrolled agent, or payroll service.

6 Ways to Pay Your Tax Bill

The IRS offers numerous ways to pay a tax bill to make it easier for business owners to meet their tax obligations. Depending on the amount of taxes owed, certain tax payment methods are unavailable.

• Direct Pay with a bank account. Businesses can pay their balance dues, Federal tax deposits, and other Federal income taxes directly from their bank account. Direct Pay is free and secure, and no sign-in is required. Payments cannot exceed $10 million.
• Electronic Federal Tax Payment System (EFTPS). Through the EFTPS system, taxpayers can schedule income tax, employment, estimated, and excise tax payments up to 365 days in advance. Tax payments of $10 million or more must be made through the EFTPS or a wire transfer from your bank account.
• Wire transfers. Initiate payment from your bank to the IRS through a same-day wire transfer. Complete the same-day taxpayer worksheet from the IRS and use it to send the wire from your bank account to the IRS.
• Debit or credit card payments. The IRS partners with three third-party payment processors to accept tax payments by debit or credit cards. Through these companies, you can pay online or over the fee for a fee of up to 1.98% of the transaction amount. Limits apply to the transaction amounts and payment frequency.
• Mailing a check. Although electronic payments are faster and more secure, paying your tax bill by check or money order remains an option.
• Cash payments. Taxpayers who prefer to use cash to pay their tax bill at participating retail partners. Cash payments through VanillaDirect are available in all 50 states and Puerto Rico. There are 17 participating retailers including CVS Pharmacy, 7-Eleven, Walmart, and Dollar General.

The IRS2GO mobile app provides a mobile-friendly way to pay taxes, including sending payments through Direct Pay. If you're unable to pay your taxes, a tax payment plan can avoid unnecessary interest and penalties that increase your tax bill.

How To Finance Your Tax Bill When You're Low on Cash

Tax season is already one of the most stressful times for small business owners. If you don't have the money to cover your tax bill, the stress can be exponentially worse.  Not paying your taxes can result in interest charges, late fees, and other penalties. If you don't pay, the IRS can place liens on your business, levy wages, freeze bank accounts, or seize assets. In some cases, there can be criminal penalties as well.

Luckily, there are ways to finance your tax bill and pay it off over time. If you need help paying tax debt, here's how to pay back taxes to keep the IRS happy and your business in good shape.

Get a Business Loan

Loans are typically used to finance the expansion of your business. However, you can also use them to cover tax bills, tax payment plans, and other debts. While you will pay interest on the loan, spreading out payments over time can simplify your cash flow and allow you to keep investing in your business. As your business grows, most loans allow early payment to avoid paying extra interest charges.

Paying by Credit Card

Credit cards are generally an expensive way to finance debt. But they are also convenient and easily accessible, which can be an excellent option when you're strapped for cash. If you must put your tax bill or tax payment plan on a credit card, consider getting a new card that offers a 0% intro APR offer so you can avoid interest charges during the promotional period.

Some business owners choose to pay taxes with a credit card because of the rewards they can earn. Rewards credit cards not only offer cash back, miles, or points on every purchase, but some offer other benefits based on your cumulative purchases each year. You may also be eligible for a welcome bonus when opening a new card. These rewards and perks can offset the transaction costs of the third-party vendors that process tax payments.

Merchant Cash Advance

Instead of taking out a traditional loan from the bank, you can use your credit card receipts and customer payments to secure a loan. With a merchant cash advance, you'll get a lump sum of money today, then pay it off over time as you collect money from customers. For example, many law offices use LawPay to collect payments from clients using credit cards, debit cards, or eChecks. These payments can be used to secure a loan to pay your taxes.

While merchant cash advance financing can be more expensive than a traditional loan, they generally have lower credit requirements and may offer approval more quickly. With these loans, you may be able to write off the interest, while deducting interest and penalties charged by the IRS on back taxes and tax payment plans is generally not allowed.

Home Equity Loan or Line of Credit

Instead of a tax payment plan, you may be able to tap your home equity to get the money you need. A home equity loan offers a lump sum of cash that is repaid over a specific loan term time without affecting your primary mortgage. They have fixed interest rates, and specific monthly payment amounts.

A home equity line of credit (HELOC) is a flexible financing option with a variable interest rate and a maximum credit limit. Pay your tax bill with the HELOC, then make interest-only payments during the draw period. As you pay down the balance, you can use your available credit for other purchases, like home improvements, debt consolidation, or school tuition.

Retirement Accounts

As a last resort, consider withdrawing from your retirement accounts or borrowing against your 401(k). Early withdrawals from retirement accounts can not only increase your taxable income, but you may also owe a 10% penalty. If you make a withdrawal, you cannot put the money back later, which means you'll miss out on a lifetime of tax-advantaged growth.

Taxpayers cannot borrow against their Individual Retirement Accounts (IRAs), but loans against a 401(k) or other company retirement plan may be an option. While the loan is outstanding, you'll miss out on market gains, and your paycheck contributions will go toward repaying the loan instead of increasing your balance. If there's a balance owed when you leave the company, it will convert into a taxable withdrawal, which will increase your tax bill and may trigger penalties.

Working Out A Deal With The IRS

The IRS also offers tax payment plans for taxpayers who are unable to pay their tax bill in full. If you decide to pursue one of these options, act quickly to minimize the interest charges and penalties that may apply to your balance.

• Online Payment Agreement. This option is available if you've filed all your tax returns, and your business owes less than $25,000. Most taxpayers qualify, and the tax payment plan can be set up in minutes online at gov/opa.
• Installment Agreement. If you don't qualify for an online payment agreement, an installment agreement is the next option. You can apply for this tax payment plan by phone or by mail. Once approved, payments are automatically deducted from a linked bank account.
• Temporarily Delaying Collection. The IRS can be aggressive in its attempts to collect overdue tax bills. You can request a temporary delay by proving that you’re unable to pay until your financial condition improves. However, penalties and interest will continue to accrue until your balance is paid in full.
• Offer in Compromise (OIC). If you qualify for an OIC, the IRS will accept a lower settlement amount. An OIC pre-qualifier tool helps taxpayers determine the likelihood of the IRS accepting their offer.

Should You Take Out a Loan or Contact the IRS?

If you're unable to pay your tax bill, you may be deciding between borrowing money or working out a tax payment plan with the IRS. Before looking into other financing options, talking to the IRS to set up installment payments or other arrangements should be your first move. You may qualify for a tax payment plan or installment agreement that offers better interest rates and loan terms than a traditional bank, credit card, or alternative lender.

Sometimes, the IRS will take a lower lump sum payment if they think it’s their best option for recovering at least part of the tax bill.

Setting up an installment plan is the most common way to arrange to pay your taxes. When setting up an installment plan, the IRS will look at how much you owe, any cash on hand that you have, and your regular income to determine the loan terms. You may have to pay an initial fee to initiate the set-up process for longer-term loan arrangements.

IRS loans come with monthly payments and interest rates. Tax payment plan arrangements with the IRS often come with relatively low interest rates compared with private lenders. The IRS may also be willing to customize repayment terms based on your situation.

The Bottom Line

No matter what type of business you're in, paying taxes is an obligation that all small business owners must face. Unfortunately, some entrepreneurs face cash shortages that make it difficult to pay their tax bills. When thinking about how to pay taxes, you may be tempted to take out a loan. However, the IRS offers a tax payment plan based on your ability to repay, and the interest rates and loan terms may be better than traditional banks or alternative lenders can offer. Before taking out a loan, contact the IRS to see how they can help pay tax debt.

However, it can be beneficial to consult a tax professional before making any tax-related decision.

Frequently Asked Questions

Can I Do a Payment Plan on My Taxes?

Yes, you can request a tax payment plan from the IRS online or over the phone. If you've filed all of your forms and your business owes less than $25,000, you may qualify for an online payment agreement. Otherwise, an installment agreement may be a great option to make regular payments through your bank account.

How Many Months Will the IRS Do Payment Plans?

Short-term tax payment plans allow individuals an extra 180 days to pay your tax bill of up to $100,000 in full. If you need more time, the IRS offers long-term tax payment plans for up to 72 months. Business owners with online tax payment plans get up to 24 months if their debt is under $25,000.

What is the Minimum Payment the IRS Will Accept?

The minimum due on a tax payment plan depends on how much you owe, the repayment term, and your ability to pay. In an installment agreement of up to $50,000, the typical minimum payment is the amount you owe divided by 72.

How Much Will the IRS Usually Settle For?

With an Offer in Compromise (OIC), you can settle your tax bill for less than you owe based on your financial condition. The payment can be made as a lump sum or through a tax payment plan. Your OIC is a combination of how much you can pay each month for one year plus the available equity in your assets.

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