It was my first year of being self-employed, and the first time I had filed taxes as a business owner, rather than an employee. Days before my tax return was due, I received a call from my accountant informing me I owed the IRS around $6000. He may as well have said $600,000; it was an enormous sum to me and I immediately went into panic mode, trying to figure out where I’d drum up that kind of cash.
If you find our business in the same bind where you owe taxes but don’t have the cash to pay them, what can you do? Ignoring the debt isn’t an option: interest and penalties will continue to accrue and the IRS may file a business tax lien which will severely impact your business credit.
Here are three options to consider.
Paying Your Business Taxes When You Don’t Have Cash
1. Put it on a credit card.
Taxes can be charged to a credit card through an IRS-approved provider,” explains Barbara Weltman, author of J.K. Lasser’s Small Business Taxes 2019: Your Complete Guide to a Better Bottom Line. “But this is expensive for two reasons,” she warns, “the convenience fee paid to the IRS-approved provider and the interest cost on the credit.” The IRS passes the cost of merchant processing fees to the taxpayer and those fees range from 1.87% to 1.99%.
An alternative: get a card with a 0% APR promotion. You’ll still pay the convenience fee, but you won’t have to pay interest if you pay it off before the 0% promo rate ends. For example, you may be able to get a card offering 0% for 15 months, giving you time to tackle that debt. (Tip: Use a business credit card that doesn’t report to personal credit if you don’t want this debt to affect your personal credit scores.)
Another possibility is to request a low-rate balance transfer from your credit card issuer and have the funds deposited in your bank account, so you can then pay the tax bill by check or ACH withdrawal. You’ll avoid the credit card convenience fee if you charge your payment and, if you shop wisely, get a low interest rate. Understand though: there will likely be a balance transfer fee of 2— 5% charged immediately. Plus if you don’t pay off the balance before the balance transfer rate expires, your interest rate will likely go up significantly.
2. Get on a payment plan.
The IRS may help you pay the debt you owe. “Businesses (including owners reporting their share of business income on their personal returns) that cannot pay their taxes on time should consider requesting an installment agreement,” suggests Weltman. “This will minimize interest and penalties.”
This option is not free. The IRS charges a set-up fee for an installment agreement; it ranges from $31 to $225, depending on the plan you choose and the method you use to apply. (Applying for an installment agreement online is cheaper than applying by phone, mail or in person.) In addition, you’ll pay interest on the balance until it is paid off. That interest rate changes quarterly and is currently 6%.
Weltman notes that there is a special installment agreement for small businesses that can’t pay their employment taxes. Businesses with employees can qualify for an In-Business Trust Fund Express Installment Agreement (IBTF-Express IA), which do not require a financial statement or financial verification as part of the application process.
3. Get a loan.
If you can pay your tax debt within 120 days, you can avoid the cost of setting up an installment agreement. (Penalties and interest will still apply until the debt is paid, though.) In the meantime, you can consider using a line of credit or a term loan to pay the tax debt. The question to ask, says Weltman, is “Will this cost more or less than an IRS installment agreement?” Because of the low rate the IRS charges, the installment agreement will typically be cheaper than a loan. But if your business isn’t eligible for an installment agreement, or if you don’t want IRS debt hanging over your head, it may be an option to consider.
That’s what I did that year I didn’t have the funds to pay my taxes. I took out a personal loan and, fortunately, my business income was sufficient to pay it back in a short period of time. I also hired a different accountant and started setting more money aside for quarterly taxes so I wouldn’t have to face one of those the gut-wrenching phone calls telling me I owed a the IRS a big chunk of money.
If you’re in a serious cash crunch and can’t afford any of these options, talk with a tax professional. You may need to consider an offer in compromise.
This article was originally written on February 1, 2019 and updated on December 10, 2020.