Every two weeks, you get a paycheck: your gross salary minus the taxes you owe to the state and the IRS.
You pay taxes all year, and your employers pay, too. So why would you have a tax bill on April 15th?
“Why do I owe taxes?” is a question mention ask, especially when you earn below $50,000 and pay your fair share already.
We show you why you might still owe federal taxes and what happens if you’re unable to pay them. Keep reading for the complete guide to paying your taxes.
Why Do I Owe Taxes? Two Potential Reasons
There are a few reasons you might owe taxes. For the average earner, there are likely only two reasons: you withheld too little, or you have additional income.
Here’s what to do to fix that.
Owing Taxes Due to W-4 Mistakes
To understand why you still owe taxes, let’s go back to the day you started your job.
When your employer hired you, you filled out a stack of seemingly endless paperwork. One of those papers was the W-4 form.
The W-4 form includes the allowances you request from the IRS. Listing more allowances means you keep more of the money you earned up front. However, paying less in tax also puts you at risk of underpayment.
If you over-estimate how many allowances you have or select a filing status that doesn’t suit you, then you will find yourself with a tax bill.
Filling out your W-4 incorrectly doesn’t mean you pay more tax. Your tax band doesn’t change because of a mistake. You’ll still pay the same amount of tax you would have if you had filled it out more conservatively.
The difference is that the IRS asks for the rest of the payment as a lump sum in April rather than taking it gradually over the tax year.
If you get a 1099-MISC, then you earned extra income.
Who doesn’t love more money?
Unfortunately, your tax isn’t withheld from 1099 income, which means you’ll need to declare it at tax time.
You can pay self-employment annually in April or quarterly throughout the year.
Additional income may also come in the form of another W-2 job.
How to Pay the Taxes You Owe
Did you get a tax bill? If you’re like many people, it’s not only a surprise, but you might not have the cash to pay it on time.
In an ideal world, we would all have the taxes we owe ready to pay on April 15th. Unfortunately, we don’t live in that world. Thankfully, the IRS recognizes that.
The IRS is relentless in many ways, but you shouldn’t panic if you can’t pay your full tax bill. Here’s what to do if you owe taxes and don’t have the cash.
1. File Your Return Anyway
Don’t put off filing because you can’t pay.
Filing late adds penalties to the amount you already owe, and those penalties aren’t generous.
The IRS recommends filing on time and paying as much as you can. You’ll avoid the late fees and reduce the amount you owe, which in turn reduces the amount of interest you’ll pay on the balance.
2. Look for Other Ways to Pay
Do you have another method of payment available to you?
If so, use it now.
IRS penalties and interest rates are higher than even credit card rates. So, if you have the option of using a credit card, personal loan, or borrowing from another source, it may be a good idea.
It sounds strange given the interest rate on credit cards. However, even the IRS recommends this course of action. You’ll be able to pay back the balance on your terms.
Plus, lenders tend to be more amenable than the IRS. Creditors can send you letters and hound you with phone calls if you don’t pay. However, the IRS can seize your assets, put a lien on your property, and even garnish your wages.
Unlike other creditors, the IRS doesn’t need a judgment to do just that.
So, if the balance on what you owe is small enough and you have another payment option, use it if it makes sense for you. You’ll end up spending less and likely have lower payments than you will if you pay your taxes late.
3. Ask for Relief from the IRS
Are you out of options? Don’t panic.
If credit isn’t an option, don’t let the tax bill sit on your kitchen table. Ignoring the IRS is the worst route to take. They know where you live. More importantly, they know where you work.
Ignoring the payment request letters will result in the IRS taking dramatic actions, and it won’t be favorable to you.
Instead, get in touch with the IRS. Let them know that you can’t pay your taxes, and talk to them about what options are available to you.
Here are a few of the options you can negotiate with the IRS:
Installment agreements are available to individual taxpayers owing less than $50,000 in combined tax, interest, and penalties. To qualify, you’ll also need to have filed all your tax returns for previous years.
An installment agreement allows you to make monthly payments on your bill. A discussion with the IRS will determine whether you qualify.
These agreements often give you 60 to 120 days to pay. However, you do need to pay penalties and interest even when the IRS grants installments. Still, the rate is lower than what you’d owe if you didn’t reach an agreement with the IRS.
Offer in Compromise
An Offer in Compromise is the ideal for people who can’t pay your taxes. The offer is an agreement between you and the IRS to settle the debt for less than you owe.
To receive an offer, you must qualify. The IRS offers a pre-qualifying tool online, and you’ll see whether it’s a suitable option for you.
However, a final decision requires an OIC application and an investigation.
Even if the tool says you owe all the tax due, you can still talk to the IRS about the potential of an offer.
Temporary Delay the Collection Process
If you cannot make any payments, then the IRS may grant you a temporary stay on the collection process.
The stay says that the IRS recognizes that you cannot afford to pay at the present moment. It stops collection proceedings, including the potential of garnishing your income.
A temporary delay the collection process should be a last resort. Although it stops collection proceedings, it means your tax bill will grow substantially. Additionally, the status is temporary. The IRS reviews your financial situation regularly, and as soon as you qualify for payments, it turns off the delay.
A filing extension is free, and it grants you an automatic six-month extension – until October 15 – for filing your return.
There are no requirements for asking for an extension. All you need to do is file the correct form by the deadline. If you can’t file on time, then this is your best option. The IRS can levy as much as 25 percent of the tax due as a failure-to-file penalty.
A filing extension does not grant you a payment extension. You still have to pay in April regardless. However, it does give you time to find new deductions or take advantage of tax law changes retroactively, which could get you some money back.
As a result, asking for an extension isn’t your best option when you can’t pay the amount due. Plus, you need to officially file to take advantage of the IRS’s payment plans.
What Happens If I Don’t Pay?
The IRS has ten years to collect your unpaid taxes. It also has the power to collect them in ways other creditors might not.
The IRS will collect what you owe. Whether it puts a lien on your property or garnishes your wages, you will likely pay your tax bill in its entirety one way or another.
With so many options, including lending, to pay back your taxes, ignoring the bill is a bad idea. If the IRS takes the step of garnishing your wages, it does not need to leave you with much more than you need to pay your most essential bills.
Also, you pay interest on the amount owed until you make the final payment. Your tax bill grows every day until you settle the debt.
Pay Your Tax Debt – Even If You Must Borrow
Many Americans find themselves hit with a tax bill they don’t expect and are left wondering, “Why do I owe taxes?” Unfortunately, paying it as quickly as possible your best option.
The IRS suggests borrowing the money if you don’t have the cash. Even though you have to pay interest on what you borrow, it may still be less than the penalties assessed by the IRS for paying later.
If you have no other alternatives, don’t panic – and don’t ignore the bills. Get in touch with the IRS and explain your situation. There are several options available to you that will temporarily relieve the burden.
Paying back the IRS is stressful, but it doesn’t need to be. Visit our Learning Center to learn more about protecting your finances.
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