Your tax situation can quickly become complicated when you’re self-employed. Since there’s no employer to withhold taxes for you, and no employer paying their fair share of your tax obligation, you’re on the hook for paying all taxes on your self-employment income. A lot of people who engage in the gig economy as well as those who run their own business oftentimes fail to recognize the extent of these tax obligations, which can leave them suddenly facing action by the IRS when they fail to pay or underpay their tax liabilities.
If you’ve received notice from the IRS that you’ve underpaid or neglected to pay to your owed taxes, then you need to take immediate action. Waiting too long could lead to penalties and other consequences that you want to avoid. But what, exactly, does that action look like?
How to deal with your self-employment tax debt
Although you might feel your heart skip a beat once you realize that you owe significant back taxes, there are options for you to alleviate your tax debt without having to fall into financial despair. Here are some options that might be best in your circumstances:
- Enter into an installment agreement: With this option, you basically enter into a contract with the IRS whereby you make monthly payments until you resolve your debt obligation. While you’re adhering to the agreement, you won’t be hit with ongoing interest charges. You can use this option even if you have larger tax obligations, so don’t think that you owe too much to engage in an installment agreement.
- Make an offer in compromise: Here, you offer to pay less than your full tax obligation. The IRS will likely only accept this offer if there’s a low probability that they’ll otherwise recover what you owe. Therefore, the IRS will analyze your property and your anticipated income before considering an offer in compromise.
- Challenge the tax debt owed: The IRS is far from perfect. Sometimes they miscalculate the debt that you owe, which can put you in a difficult position as far as repayment is concerned. But even if that tax obligation is erroneously calculated, the IRS isn’t going to correct it unless you challenge it and point out its flaws.
There may be other options that you can utilize, but these are the main strategies that are most often effectuated when back taxes are owed. Given that your circumstances are unique, though, it’s a good idea to discuss your tax obligation with your attorney so that you can develop a streamlined way to deal with the pressure being put upon you by the IRS.
Work to avoid burdensome tax debt
Once you’ve resolved your outstanding tax obligation, it’s important to try to stay ahead of your taxes as time goes on, that way you don’t wind up in a similar position later. To do so, be sure to track your income, overestimate the amount of taxes that you’ll owe, pay your taxes quarterly and utilize any and all business exemptions you can to reduce your tax liabilities. To ensure you’re doing everything you need to here, be sure to discuss your strategy with a tax professional.
Don’t let the IRS derail your financial stability
If mishandled, your tax obligation can wreak havoc on your business and your personal life. But you don’t have to let it get that far. Instead, you can develop a sound legal strategy that seeks to resolve your tax debt expeditiously, that way you can get past this stressful time in your life and get back to focusing on your business.
