Before we get too deep into this article, we want to break it into two parts.
- Those that can afford and want to pay their tax bill in full.
- Those that cannot afford to pay their tax bill.
Lets start with those that have the money to pay for the tax bill right away!
How Do I Make A Tax Payment?
Here the options to make a regular payment with the IRS:
- Have it withdrawn with the e-filing of your tax return.
- This is probably the easiest method to pay your taxes.
- Pay Online via Bank Account Using Your Online IRS Account
- You can create an online account with the IRS where you can: view your balance, view or create payment plans, make and view payments, management communication preferences, access tax records, and view tax pro authorizations.
- If you don’t have an existing IRS username, have your photo identification ready.
- Pay Online via Bank Account Using Direct Pay on the IRS Website (No Account Needed)
- This is a free service and can be used for tax payment related to your Form 1040, Estimated Taxes, Amended Returns, Installment Agreements, and Extensions.
- This does not work for business/payroll payments. For that you would use EFTPS. Note: If your business is a pass through entity (which most small businesses are) the taxes on the income of the business would be paid personally.
- Pay Online via Debit or Credit Card
- The IRS uses third party payment processors for payments by debit and credit card.
- They each have different fees depending on debit vs credit.
- You can choose which one you want to use here.
To make state tax payments you will want to check with your specific state. Typically I recommend Googling “How to make [Enter State] tax payments” and follow the options available. Just ensure you are on a state specific site and be careful!
What Do I Need To Know If I Cannot Afford To Pay My Tax Bill?
First off, if you cannot afford to pay your tax bill, do not panic. There are options available but there are some key things you want to ensure you are doing.
Make sure at a minimum you complete a few important items.
- Ensure you still file your tax return (or request an extension) by the deadline.
- The worst thing you can do is avoid filing a tax return all together as this will just make the penalties and interest that much worse. You would now have Failure To File AND Failure to Pay penalties with interest.
- Pay as much as you can with the tax return (or extension) filing to avoid penalties and interest as much as possible.
- Remember an extension is NOT an extension of time to pay, just an extension of time to file.
- Understand you are not alone, this can be common especially with small business owners.
- Do NOT just avoid the situation. It can be stressful but do not allow yourself to simply ignore the situation.
- If you extend your return be sure to file your return by the final deadline, regardless of ability to pay. Failure to file penalties can be brutal!
What Happens If I Do Not Pay My Taxes On Time?
Lets talk penalties and interest…
- Failure to Pay Penalty
- 0.5% per Month (Maximum 25%) of the tax owed after the due date
- If IRS issues a notice of intent to levy or seize property, the rate increases to 1% per Month.
- Failure to File Penalty
- 5% per Month (Maximum 25%) of the unpaid taxes
- If both a Failure to File and Failure to Pay Penalty are applied in the same month, the Failure to File Penalty is reduced by the amount of the Failure to Pay Penalty for that month, for a combined penalty of 5% for each month.
- If after 5 months you still haven’t paid, the Failure to File Penalty will max out, but the Failure to Pay Penalty continues until the tax is paid, up to its maximum of 25% of the unpaid tax as of the due date.
- Federal Short-Term Rate Plus 3% – Compounded Daily
- The interest is also on any penalties.
What Options Are Available To Pay My Taxes?
- Borrow the Funds
- Consider borrowing the funds needed to pay your taxes. Often times you can get a better rate on borrowing than what the IRS will charge.
- Be careful with this and make sure you are making a good decision based on the interest rate comparison.
- Short-Term Payment Plan or Installment Agreement
- Agreement with the IRS to pay your taxes over time.
- You can apply for an Installment Agreement using Form 9465 or Apply Online
- If you get approved for a payment plan ensure that you stick to the payments and do NOT miss them!
- Offer In Compromise (OIC)
- Agreement between taxpayer and IRS that resolves a taxpayer’s tax liability based upon a lower agreed upon amount.
- Note this may sound easy but it is a lengthy process and nothing that is for sure. The IRS will dig into everything (your income, your assets, etc) and determine whether you can afford the tax bill or a payment plan.
- The IRS has a pre-qualifier tool to see if it would even be worth your time exploring this.
Most states also have various payment plan options available too so be sure to do a search on the state site as well!