It’s nice being an independent contractor isn’t it? You have more freedom to do your job the way you want to, and you often get paid more than if you were a W2 employee! Talk about a win-win. That same freedom and higher pay can get you into trouble if you aren’t staying on top of your tax payments, since you don’t have an employer making those payments for you.
So, what do you do when you get to the end of the year, you file your taxes and find that you owe more than you are able to realistically pay? The IRS understands that sometimes taxpayers fail to plan correctly (particularly if you’re not our client J), which is why the IRS has programs in place to help you to pay back the taxes you owe.
So, if you owe the IRS back taxes, first and foremost, FILE YOUR TAX RETURNS, even if you’re several years behind. Don’t try to avoid your tax liabilities. The IRS is aware of what you owe, and by not being proactive and taking your tax liabilities head on, you might actually compound your issues. In fact, if you haven’t filed all your tax returns, the IRS will not even consider your case.
Penalties
After filing your tax returns, you should contact the IRS to determine the total penalties accumulated with the goal of getting them minimized before you negotiate a payment plan.
If you have paid your taxes on time in the past, you can simply ask if you can waive the penalty. The IRS will take into consideration your tax history and if you haven’t previously had any infractions, you can have your penalty waived.
Once you have taken care of your penalties (or at least tried), you need to set up a payment plan with the IRS.
Payment Plan
If you owe less than $50,000 in combined tax, penalties and interest to the IRS, you probably qualify to set up a payment plan to pay your IRS tax liabilities over a three year period.
If you owe less than $10,000, you can most likely go through the process of setting up a payment plan entirely online. No need to speak to an IRS agent or anyone else. A general rule of thumb: you want to sign up for the bare minimum payment, but pay more when you can. So, if the minimum payment is $100, but you want to pay $300, sight up to $100, and pay the $300 when you can. The whole point is to give yourself some leeway, so you don’t find yourself underwater if times get tough.
You can set up your payment plan by filling out the IRS Form 9465, or by going to the IRS website, or clicking the link here: Click Here!
Criteria for setting up a payment plan
What not to do
Don’t put your tax bill on a credit card. The IRS charges a lower interest rate than your credit card provider, and at this point it’s all about damage control. So limiting how much you have to pay overall is best.
Also, don’t take money out of your retirement accounts to pay your taxes. You may owe a penalty as well as income taxes, on the money you withdraw from the account. It won’t save you any money to do this, because as has been said, the IRS has considerably lower interest rates than any amount you might pay in penalties and income taxes based on a withdrawal from your 401K.
Last resort
If you owe more to the IRS than you are able to realistically pay over a 3 year period, there is an option that we only recommend if it’s truly your last option. It’s called an “Offer in Compromise.”
An offer in compromise is essentially an IRS declaration of bankruptcy, so obviously they don’t make easy. It allows you to negotiate a settled amount that you pay to the IRS, that is less than the total owed, to clear your tax debt.
Independent Contractor Tax Advisors is a CPA firm focused on proven strategies to reduce your taxes. We help clients all over the country reduce their taxes by thousands every year.
Seriously, thousands.
If you want to find out how we can help you reduce your taxes, audit risk, and headaches, then please contact us today to set up free tax consultation!
CLICK HERE FOR A FREE TAX CONSULTATION
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