Newstricky| Of the tens of millions of small businesses in the US, approximately 73 percent of them are sole proprietorships. This is the type of business most freelancers work under. While it is a fast path to entrepreneurship, it does come with its fair share of pitfalls.
One of the most common pitfalls people new to sole proprietorship fall into is their tax bills. Assuming your new business makes money, meaning $400 or more per year, you generally owe self-employment taxes to the IRS and likely to your state taxation agency as well. That’s often 25 percent to 30 percent of your revenue.
Do you owe taxes you didn’t plan on? Keep reading for some common payment options.
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Full Payment
Even if you didn’t plan around a tax payment, it doesn’t necessarily mean you can make the payment. There are a couple of methods of paying tax bills you might want to consider.
For example, let’s say you just need a little more time for payment to come in on a big job. You could put the payment on a credit card. Be sure before you go this route though.
The interest on a credit card often far exceeds what you pay in interest and penalties on an outstanding balance with the IRS.
If it’s available, you can also dip into savings for the payment. While not ideal, it’s often preferable to owing those back taxes.
Short-Term Repayment Options
As a general rule, the IRS would much rather you simply pay your taxes than pursue you through other means. If you think you’ll have the money within the next few months, you can apply for a short-term repayment plan. The option basically gives you up to an extra 180 days to settle up with the IRS for past due amounts.
They also offer a number of tax bill payment methods, such as direct payments from checking or savings accounts, debit or credit cards, as well as checks or money orders.
Long-Term Repayment Options
If the short-term option doesn’t work, that can leave you wondering how to pay back taxes. The other main option for taxpayers with outstanding tax bills is a long-term repayment agreement.
With long-term repayment agreements, you essentially make a monthly payment the way you would with other bills. While this approach can solve the problem, it also comes with a setup fee that can go as high as around $150.
Tax Bills and You
Tax bills can often come as a shock to a freshly minted entrepreneur. Setting aside around 30 percent of your earnings is the safest bet for avoiding a bill you can’t pay.
If you didn’t know that the tax bill was coming, you aren’t out of options. If you can scrounge up the money from somewhere, such as savings, you can just make a lump sum payment to the IRS and call it a day. The IRS also provides short-term and long-term payment options.
Looking for more tips on managing financial health? Check out the Finance posts over in our Business section.
