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Design freelancers: Here’s how to handle an unexpected tax bill

Is your tax bill from the IRS larger than expected? Don’t panic. Here’s how you may be able to reduce it — or, in the worst case scenario, pay it off on time.

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Reduce your tax bill by amending your return

If you’ve already filed your taxes with the IRS, the only way you can go back and make your tax bill smaller is by amending your return.

Amending your return doesn’t result in any penalties. However, it takes extra work, and increases the time the IRS needs to process your return (and send you a refund, if you qualify.)

How can amending your return save you money? Your tax bill might be plus-sized because of a mistake you made. For instance:

  • Forgetting to write off a major deduction like rent
  • Failing to deduct employee expenses
  • Not carrying forward tax credits from previous years
Going back and correcting any of those mistakes could reduce your tax liability.

If you didn’t make a mistake, you may still be able to go back and retroactively make tax moves that save you money. For instance:

  • Opting for itemized deductions, rather than the standard deduction
  • Changing how you report deductions—for instance, whether you deduct your vehicle mileage per mile or by a percentage of use
  • If you’re a multi-member LLC, electing one filing status that is taxed less than another

If you’re going back over your already-filed return, and planning to file an amendment, get help from a tax professional. After looking at your books, they can answer any pressing questions you may have.

2019 Tax Amendment Deadlines and Forms

Entity type Tax Amendment Form Tax Amendment Deadline
Sole proprietorship or single-member LLC IRS Form 1040X April 15, 2020
Partnership or multi-member LLC IRS Form 1065 March 16, 2020
S corporation IRS Form 1120S March 16, 2020
C corporation IRS Form 1120X April 15, 2020
4 options for paying off a large tax bill and stressing less

So, after looking at your return with a professional, you’ve amended your return to shave down your liability, and your tax bill is still more than you can pay.

When you can’t afford to pay your taxes, the worst thing you can do is avoid the IRS. Every day you avoid the problem, you’re losing precious time. Once the payment deadline goes whooshing by, you’ll start paying percentage points on any money you owe the IRS.

The worst thing you can do right now is try to run away from the problem. So don’t hop on a flight to Panama just yet.

You’ve got options when it comes to paying down your massive bill. Four, in fact.
1. Set up an installment plan with the IRS

An installment plan lets you pay down your tax debt gradually, in bite-size chunks. You qualify for an installment plan if:

  • You owe $10,000 or less in taxes, and
  • You can prove you can’t pay the amount you owe now, and
  • You can pay off the tax in three years or less

To qualify for an installment plan, file IRS Form 9465. Filing online saves you money—it lowers the installment user fee.

2. Make an offer in compromise

In terms of negotiating with the IRS, an offer in compromise should be your last resort. An offer in compromise is a lot like going bankrupt—it gets you out of debt, but at major cost.

An offer in compromise lets you pay off all your tax debt for less than the total cost of the debt.

To qualify for an offer in compromise, you negotiate with the IRS, with help from a qualified tax professional.

If you’re accepted, you’ll have to pay your total net worth, minus debt, to cover your taxes.

Clearly, this only makes sense if you owe more in taxes than what you have in the bank. In fact, it only makes sense if your tax debt is truly insurmountable. Be sure to talk to a CPA before taking this route.

3. Take out a business loan or get a line of credit

Paying interest on money you borrow from a bank may be cheaper than paying interest on money you owe the IRS.

The IRS charges 4% per day on money you owe them. If you can borrow a pile of cash from the bank, and pay off your debt in one fell swoop, you’ll avoid that penalty.

This option makes sense if you can qualify for a loan or line of credit that has an APR lower than what the IRS charges in penalty fees. You’ll still be paying money to borrow, but it’s less than what you’d pay to the IRS.

Before signing up to borrow, put together a plan to pay off your debt. It may accrue less interest than unpaid taxes, but it’s still a drain on your bank account, and you should try to eliminate that debt ASAP.

4. Use a credit card

Paying taxes with a credit card may sound scary. But, in a limited range of situations, it’s a smart choice.

The IRS charges 4% per day on money you owe them. If you can borrow a pile of cash from the bank, and pay off your debt in one fell swoop, you’ll avoid that penalty.

Many new business credit cards offer a 0% APR introductory offer, some for up a year. If you can qualify for a high enough credit limit to pay your taxes, and make a solid plan to pay down the debt in a year or less, you could end up borrowing money for free. You’ll be dodging IRS penalties at the same time.

A word of warning: Any credit card’s APR will be significantly higher than a loan or a line of credit. So, if you’re not sure you can afford to pay down your bill before the 0% APR runs out, you should try borrowing money a different way.

Also, keep in mind that maxing out a credit card can affect your credit score; the higher your credit utilization ratio (the percentage of your total credit you use), the more likely your score will suffer.

How to avoid unexpected tax bills in the future

Once you’ve handled this year’s bill, it’s time to take steps so that you’re never left scrambling again. Here’s what you can do to avoid big, unexpected tax bills in the future.

Set aside enough for quarterly estimated payments

Rule of thumb: Set aside 30% of your self-employed revenue for taxes.

When you work for someone else as an employee, they automatically withhold income tax, as well as Social Security payments. When you work for yourself, it’s up to you to withhold that amount.

Set aside roughly one third of your income every time a client pays you, or at the end of every month. By tax time, you’ll be glad you did.

Itemize deductions

Opting for a standard deduction makes filing your own taxes easier. But you could be missing out on tax savings.

As your business gets bigger and begins to incur more expenses, you’ll qualify for more tax deductions. Itemizing them and deducting each could lower your tax liability more than the standard deduction would.

Talk to a CPA—they can help you crunch the numbers and figure out which deduction is right for you.

Keep your books organized

Organized bookkeeping, like Bench, lets you track every single eligible deduction. It also lets you create projections for your business—so you can plan how to pay down your tax bill, whether that’s with a loan or via an IRS installment plan.

Stay on top of tax law changes

When you keep an eye on changes in tax law, you avoid nasty surprises.

For instance, in 2018, the Tax Cuts and Jobs Act reduced or eliminated entertainment and staff meal deductions, helping to increase the tax bill for many businesses.

At the same time, it reduced corporate taxes across the board, opening up new ways to save on taxes for business for businesses willing to incorporate.

Tax code doesn’t make for the most thrilling read. But it affects how much you pay—and that affects your business.

Hire an accountant or tax advisor

Most accountants or tax advisors are willing to sit down with small business owners for a free consultation. During that consultation, they should be able to show you ways they can save you money on taxes.

Paying a CPA or other professional to help you could be cheaper, in the long run, than footing a massive tax bill.

Bench accountants are ready to help.

Use BenchTax

Bench is North America’s largest bookkeeping service. When you sign on with them, you’re assigned a team to do your bookkeeping for you, and an intuitive app to track your finances.

A giant tax bill is never a friendly sight, but if you get organized quickly, you can reduce it retroactively—or, worst case scenario, pay if off as soon as possible!