I Owe Taxes. Now What?

May 15, 2024 | Taxes

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Find out how to address a delinquent bill with as little stress as possible.

Running a business and watching as you rack up sales is an exhilarating experience. But discovering that you owe more in taxes than you anticipated can take the wind out of your small business sails faster than you can say, “IRS.”

Suddenly, you’re faced with a financial obligation that might not have been part of your planned budget.

Whether it’s due to underestimating your income, neglecting to make quarterly payments, or simply an error in your initial calculations, facing a tax bill you weren’t expecting can feel daunting.

Before you run away to hide or start planning an international move (kidding!) remember a couple of key points here:

  1. You are NOT alone. Plenty of small business owners experience this exact conundrum. So don’t be embarrassed and don’t worry that all is lost. It’s all good. You will be okay.
  2. There are steps you can take to address your tax situation calmly and correctly. Promise.

Let’s get into it.

Step One: Understand What They’re Asking You To Pay

When you find out you owe money to the IRS, it’s important to first understand why. Here are the common components of a small business tax bill:

  • Federal Income Tax: This is the tax on your earnings after deductions and credits have been applied.
  • Self-Employment Tax: For freelance coaches and consultants, this covers Social Security and Medicare contributions. The self-employment tax rate is generally 15.3% of your net earnings.
  • State Taxes: Depending on your state, you may also owe state income taxes, which can vary widely.
  • Possible Penalties and Interest: If you underpaid taxes during the year or missed deadlines, your bill might include additional charges for penalties and interest.

Step Two: Determine the Event That Caused You To Owe Money

Understanding why you owe taxes can help you better prepare for the next tax season. Here are some of the usual suspects:

  1. Insufficient Quarterly Payments: If you’re self-employed, you’re required to make estimated tax payments quarterly. Failing to do so, or underestimating the amount you owe, can lead to a tax balance due at the end of the year.
  2. Poor Money Management: If you haven’t perfected the art of managing your finances, it can be easy to spend money that should actually be going toward your taxes. At TSJ, we always recommend that you put 30% to 40% of your income into a separate tax account to avoid the temptation to spend.
  3. Underreporting Income: It’s easy to overlook or underreport income from various sources, especially for freelancers who might have multiple small projects.
  4. Changes in Tax Law: Tax codes change often, and new rules can affect your tax liabilities. It’s important to stay updated or consult with a tax professional to understand these changes.
  5. Deductions and Credits: Not claiming enough deductions or credits for which you are eligible can increase your tax burden. On the other hand, incorrectly claiming deductions or credits can lead to an audit and subsequent penalties.

Step Three: Understand Your Tax Payment Options

Knowing the steps you can take to address your tax situation goes a long way toward calming your anxiety. Here are the repayment options offered by the IRS:

Option One: Full Payment

Paying your tax bill in full is undoubtedly the best way to avoid extra fees or interest.

Fast payment eliminates the debt lickety-split and ensures peace of mind.

If you’re able to do so, this route saves you from prolonged liabilities and potential accruals of fees and interest.

If you can’t pay in full, then you’ll need to determine if you meet the eligibility criteria for an IRS payment plan.

Option Two: IRS Payment Plan

If full payment isn’t feasible, the IRS offers payment plans that allow you to pay off your tax debt over time.

To qualify, you must 1) file all required tax returns, 2) demonstrate an inability to pay the full amount up front, 3) timely file all future tax returns, and 4) pay all future tax liabilities by the due date.

Option Three: Offer In Compromise

You might be able to settle your tax debt for less than the full amount through an Offer in Compromise. This option is only available if you can prove that paying the full amount would cause financial hardship, doubt as to liability, or effective tax administration.

The IRS considers your income, expenses, asset equity, and ability to pay when determining eligibility, so if you can avoid this route, you should do so at all costs!

Option Four: Delay Payment

If you’re experiencing financial difficulties, the IRS may grant you a short-term delay in payment. Although this can temporarily relieve your tax burden, be aware that penalties and interest will continue to accrue until your tax bill is paid in full.

Struggling to Set Up Your IRS Payment Plan?

Let Tax Savvy Jessica guide you!

Jessica will expertly navigate the complexities of your personal tax situation so you can get right with the IRS ASAP.
Are you ready for a stress-free, cost-efficient, personalized tax solution?

Let’s get started!

How To Avoid Owing Unexpected Taxes in the Future

Owing taxes to the IRS is certainly not an experience you want to repeat. To avoid putting yourself in the same situation again next year, follow these tips to ensure timely and accurate tax payments:

  1. Pay Your Quarterly Estimated Tax Payments: To avoid surprises on your next tax bill, make estimated tax payments throughout the year. This is particularly important for freelancers and small business owners whose income doesn’t have taxes withheld by an employer.
  2. Change Your Tax Withholding: If you have both self-employment and regular employment income, ensure your tax withholding is accurately adjusted by submitting a new W-4 form to your employer. This can help prevent owing taxes at the end of the year.
  3. Improve Your Financial Planning Skills: Effective budgeting and financial planning are essential to manage your tax payments. Tools like budgeting software or spreadsheets can help you track your income and set aside sufficient funds for your tax obligations.
  4. Get Help From a Tax Pro: A tax expert like Tax Savvy Jessica can offer personalized advice and help you navigate complex tax situations, ensuring you take advantage of all available deductions and credits.
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Dealing effectively with tax debt is crucial for maintaining good financial health. Consider these strategies not only as immediate solutions but also as steps towards more robust financial planning.

If you find yourself overwhelmed, seek advice from a tax professional sooner rather than later.

Want Expert Help? Let Tax-Savvy Jessica Take the Wheel.

Here at TSJ we love a good list of tax planning strategies. But what do we love even more?

Getting the chance to rock our clients’ worlds with tailor-made tax strategies and services, alleviating overwhelm and rekindling the joy in running their businesses!

Tax Savvy Jessica has 15+ years of experience helping her clients navigate complicated tax rules like these.

Let us handle the taxes so you can run your business in peace.

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Hi, I’m Jessica.

I’m the passionate tax-pert behind Tax Savvy Jessica. I spent more than 10 years performing audits for the IRS. My experience there taught me how to understand taxes from the perspectives of both taxpayers and the IRS.

I started Tax Savvy Jessica because I’m passionate about helping small business owners understand their taxes so they can use their money to build the life they want.

Free up more money to build the life you really want.

Take our Fit & Pricing Quiz to find the package that fits your needs.

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