One of the most common concerns when it comes to taxes is the possibility that you might owe the IRS money. If you are a W-2 wage earner, your employer withholds taxes from your paycheck, based on your W-9. As a business owner, freelancer, or self employed individual, you are responsible for remitting estimated taxes on a quarterly basis. Some individuals have both W-2 income and self employed income, where they might have a standard withholding and be liable for estimated taxes. Regardless of the situation, the IRS wants their money. Sometimes, withholdings fall short, or estimated taxes are underpaid. In this instance you may find that you owe the IRS money.
Ways You Can Pay
If you find that you owe the IRS money, there are several options available. Of course, the direction you select will depend on the amount you owe, and your personal financial situation. You may want to seek the counsel of a tax advisor before you make a decision. Some options you have to remit payment to the IRS include:
- Set up an IRS payment plan
- Request a short term extension, that allows you to pay the full amount due
- Apply for hardship extension
- Take a personal loan
- Borrow from your 401(k)
- Pay by credit card
Please note that if you elect to pay by credit card, processing fees will apply and vary depending on service provider. These fees may qualify as a tax deduction. Also keep in mind that high balance payments over $100K usually require coordination from your service provider.
Setting Up an IRS Payment Plan
An IRS payment plan is a good option for many taxpayers that end up owing money. The IRS refers to their payment plans, as installment agreements. The terms of your agreement will vary on how much you owe and your individual circumstances. If you can pay the balance on the amount you owe in 120 days, a short term payment plan can be set up. To do this, you must create an online account with the IRS. You can do this from their website here.
The best way to set up an installment plan, is to fill out an online payment agreement with automatic payments from your checking account. The fee to set this up is online is $31. If you apply over the phone, by mail or in person the fee is $107. For non automatic payments the online fee is $149 and if you apply by phone, by mail, or in person $225. In addition, the balance is subject to an interest penalty which is based on the short term federal rate that fluctuates with the market. However, by setting up a payment plan, the interest charged is reduced to .25% per month on the balance due. The IRS may void the installment agreement if payments are not made on schedule.
For individuals to be eligible for a long term payment plan you must owe less than 50K or less in combined tax, penalties, and interest. And all required returns need to have been filed. To be eligible for a short term payment plan you have to owe less than 100k in combined tax, penalties, and interest.
Tax Saving Tips to Avoid Future Problems
Ultimately the goal is to pay as close to the actual amount due as possible. While overpaying will ensure that you don’t owe the IRS money at the end of the year, is it really worth allowing the IRS to hold a portion of your money for an extended period of time interest free? If you are a W-2 wage earner, consider revisiting your W-9. Talk to your tax advisor to make sure your employer is withholding the appropriate amount.
If you pay estimated taxes, it is important to accurately calculate your quarterly payments. This can be done by taking the previous years taxes paid and paying 90% or 110% if you are a high income earner. Divide the amount by 4 to arrive at the quarterly payment amount. Keep in mind, that this amount can be adjusted on an as needed basis. If you project your income to be higher or lower, the amount you pay in estimated taxes should be adjusted accordingly.
As both a W-2 income earner and a self employed individual, you have to option to bypass estimated tax payments by have more withheld from your W-2. As an added security, it is a good idea to set up a tax savings account. Setting aside money for future taxes can provide a little peace of mind in the event you owe the IRS money.
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