Benjamin Franklin once said, “In this world, nothing is certain except death and taxes.” There have been several variations of this statement over the centuries, but the core sentiment remains the same. Taxes are inevitable. The question is whether you need emergency loans to pay them if you fall behind. Do unpaid tax bills classify as emergencies?
This probably doesn’t apply if you have a normal W2 job where taxes are taken out and you file for a return each year. Unpaid tax bills are more for independent contractors and small business owners, so we’ll focus on those. Viewed in that light, taking out a loan to pay taxes takes on a whole new dimension. The financial health of the business may be at stake.
What Are Taxes And How Do They Work?
Taxes are mandatory contributions that are levied by the federal or state government on individuals and corporations to be used for public services. The income tax was first introduced in the United States shortly after the Civil War. A constitutional amendment–the 16th Amendment–was eventually proposed and passed in 1909 that gave the government the power to tax incomes on corporations and individuals; the amendment was finally ratified in 1913 as the threat of World War I loomed.
The IRS and state departments of revenue charge an income tax to all eligible individuals, which is essentially anyone in the United States who has an income–but there are tax exemptions for many reasons. The rate of that tax on the federal level varies based on the amount of annual income. State taxes also vary based on income, but there are some states that use a flat tax model. Throughout the year, tax liabilities add up as income accumulates.
Traditional employers hold back a percentage of their employee’s paychecks and pay them to the IRS and state on a quarterly basis. They’re responsible for a portion of those taxes and the withholding is generally enough to cover the liability. That results in no tax bill sent to the individual employee each year. Most of the population works on this system.
If withholding doesn’t cover the tax liability, which happens with W2 employees who take too many deductions on their W4 form, the employee will get a tax bill. Independent contractors who get a 1099 each year and business owners will get a tax bill when they submit their annual tax filing. That bill will be smaller if quarterly deposits are made on schedule.
Options For Paying Back Taxes Due
What happens when you’re unable to pay your taxes? That can lead to collection notices from the IRS and potential seizures of assets, so taking out a loan to pay them may seem like a good idea. That’s one way to do it. Here are some other options to think about:
Take out a personal installment loan
A personal installment loan should offer a lower interest rate and reasonable terms that will allow you to spread your tax liability out over several months. Installment loans are available at traditional banks, credit unions, and through online lenders. There are even “bad credit lenders” who will work with you to get an installment loan if you have less than perfect credit.
Use your credit card to pay the tax bill
You could pay your tax bill with a credit card, but that means higher interest rates. In that scenario, you might be better off asking for a payment plan or requesting an extension. (More on those below.) If you do use a credit card, try to find one with a low or zero-percent interest rate. There are several of these available if you have good credit.
Request a hardship extension
A hardship extension may be granted to the taxpayer if they are under financial duress, have experienced a medical setback, or been through a natural disaster. Hardship extensions are also available for those who owe back taxes and need more time to get caught up. IRS Form 1127 is the correct form to use to file for one. It can get you an extension of 6-18 months.
Ask for an offer in compromise
Taxpayers who have fallen behind and can’t see a way to get caught up may be eligible for an offer in compromise from the IRS. You need to owe at least $10,000 in back taxes and prove that you cannot afford to pay them off. This is also known as “tax forgiveness” or “tax settlement” because the IRS may accept significantly less than what you owe.
The Bottom Line: There Are Several Ways To Pay Your Taxes
Owing back taxes is scary because state and federal governments have the authority to garnish wages and seize property if you don’t pay. Thankfully, there are several ways to come up with the money you need. Installment loans are an excellent option. Credit cards can be good if you have a low interest rate. Hardship extensions and offers in compromise were instituted by the IRS to offer some relief. You have options. Look into each of them to find the best one suited for your financial situation.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of [famousparenting.com] or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.
Our super author here at Famous Parenting and an absolute wealth of knowledge. She has studied many topics including creative writing, psychology and journalism but her real passion lies in raising her 3 children. Between working from home, homeschooling her youngest 2 children and navigating the world of teenagers she is a guru for parents.
