The economic landscape can be tough to predict, especially for business owners starting their year in 2021. The tumultuous period of 2020 set the current business landscape of 2021 and years to come. Many establishments in tech and SaaS industries had to reshuffle their business models to ensure their company’s survival during the last third and fourth quarters of 2020.
Instead of growing their company’s operations, many firms had to scale down their processes to avoid closing down permanently. The constant short-term solutions can lead to drastic consequences, especially on a company’s bookkeeping. This places many business owners at risk of failing to submit their tax quarterly payments properly and punctually.
How to pay back the tax you owe to the IRS
For businesses that are already struggling from the previous year’s blowback, it’s best to start anew without having any unpaid dues from the IRS. The risk of having a miscount or untimely submission of your form taxes can lead to massive fees. This leads to penalties of an additional 5% of your unpaid balance, which can increase to a max cap of 25%. Thankfully, there are several ways to handle your current financial predicament.
In this article, we will share three options you can do to rectify any potential penalties incurred due to the pandemic.
Set up an installment agreement
Like a loan plan, you can also settle your debt in installments, depending on how much you owe and the timeliness of your repayment. If you’re planning to make your repayments online, the application fee will be $149. If you’re classified as a low-income taxpayer, the fee will be much lower at only $43. After filling up Form 9465, the penalty for your overall unpaid balance will be 0.25% per month until you can pay the full balance on time. Additionally, the IRS can void your agreement if you fail to pay on schedule. Keep in mind that you should avoid getting an installment plan if you can pay it within 120 days.
Apply for an extension
The IRS offers a hardship extension that can apply to companies that cannot pay their taxes due to the threat of financial hardships under the IRS’ financial standards. This is a common appeal for businesses severely affected by the COVID-19 pandemic. Since it only applies during emergencies, there are no additional fees when requesting an extension. However, the interest rate is still in effect in the form of the federal rate plus 3%.
Use our 401(k) for payment
Using your 401(k) plan, you can secure a maximum of $50,000 that you can repay within five years. It’s an inexpensive way to pay for the back taxes you owe. However, it can severely impact your future retirement fund if you run into issues with repayment. Additionally, it may come with additional fees that can charge interest over time, together with a 10% early distribution penalty. It’s best to use this option only if you no longer have any other ways to pay back your debt to the IRS.
Conclusion
If there’s anything worth learning from the disasters of 2020, it’s that business owners must be adaptable by prioritizing their assets. Proper financial management is among the key factors that surviving businesses from 2020 point to as their crutch during challenging times. Optimizing your accounting is an excellent way to maintain your business’s trajectory toward growth.
A4E is a virtual accounting business that provides business owners and solopreneurs with the right tools to handle their bookkeeping and taxes. We provide expert accounting and tax services to keep your company afloat during these troubling times. Reach out to us to learn more about how we can support your business.