This guest post is provided by Kabbage, Inc.
There’s a reason people put “taxes” next to “death” on the list of things we can’t avoid. No matter how much you wish to change or avoid tax season, the government will want its piece of what you’ve earned every year, without fail. It’s the law of the land – one sometimes-hefty price of doing business. But, what if you don’t have the money to pay off your tax bill by the due date? We’ve gathered five trusted ways to ensure you pay your taxes in time.
First Things First
Even if you can’t pay any of what you owe, file your return on time anyway. Period. Penalties for not filing equal 5% of the unpaid taxes every month. That’s 10 times the penalty for just paying late on your taxes. File your taxes, even if it means paying a preparer with money you could have used to pay the tax – you’ll end up on the up side in the end.
Every business ends up in a financial squeeze from time to time, and feeling that pinch just as the government is asking for its bite can be extremely stressful. Fortunately, there are options for you to pay your tax bill and get the IRS monkey off your back. None of them are as good as just writing a check from an abundant supply of cash reserves – but hey, sometimes cash reserves dry up. These solutions can make the situation less catastrophic, if not entirely painless:
Despite its fearsome reputation, the IRS is in the business of collecting money. It’s not out to punish you, and their customer service agents are actually pretty polite since the reforms of the late 1990s. A conversation – or even an online payment agreement from IRS.gov – can net you either a 60 to 120 day payment window or an installment plan to pay what you owe. Both of those options can reduce the late payment fee from one-half of a percent to one-fourth of a percent per month.
Advantage: You don’t have to “find” extra money to pay.
Disadvantage: Time-consuming. Tax season hold times at the IRS can be in excess of one hour.
2. Borrowing From Friends and Family
A lot of small businesses get their start with this kind of funding, and there’s nothing wrong with “going back to the well,” if you feel comfortable. Heed the standard advice about how risky it is to lend and borrow money between your personal relationships, but this can often be the fastest and simplest route to extra emergency funds. Of course, this assumes your friends and family trust your business to be able to repay the loan – not always a safe assumption for your business if you’re struggling to pay your taxes, but we’ll let you decide the risk.
Awesome Advantage: Low or zero interest rates (often), and a loan that doesn’t show up on your credit record.
Slight Disadvantage: Puts strain on your personal relationships.
3. Owner Capitalization
If, as a business owner, you have the funds to manage it, you can simply invest personal funds into your company. If you are the sole owner, this can be the simplest way to get extra funds into the operating budget. If not, you’ll need to discuss the investment with your partners and decide how it affects the distribution of ownership. Selling a portion of the business to a new partner is another species of this same tactic, and always requires a redistribution of shares.
Advantage: Keeps the investment inside the business.
Disadvantage: Piles additional personal risk onto what you’ve already invested.
4. Credit Card Payment
The IRS has a few select companies that it allows to process credit cards on its behalf, allowing you to pay you tax bill using a business or personal credit card. Also, almost every business credit card available has a cash advance option, and many of those options include a zero-interest grace period measured in months or years. If your credit limit is high enough to cover your tax burden, and you haven’t already maxed out the card because your business is in temporary trouble, this can be a quick (potentially expensive) fix.
Advantage: If your card has rewards, this could pay off.
Disadvantage: Most of the credit card processing companies for the IRS charge 1.87 to 2.35 percent of the taxes paid in order to use your card. This fee, on top of paying off your credit card and its interest fees, could be an expensive option.
5. Kabbage Loan
Kabbage provides small business loans by using data, other than traditional credit ratings, to determine how much you can borrow and at what interest rate. That means businesses that need some “tax float” are more likely to be approved by an alternative lender like Kabbage, than by a bank or credit union. Speed is another advantage of alternative lending: traditional business loans can take days to apply for, and weeks to fund. A Kabbage loan hits your bank account within 24 hours of approval, and an approval decision takes only a few minutes.
Advantage: Rapid timeline…get your cash quickly.
Disadvantage: Much like the credit card, you’ll have to repay your loan with fees. Learn more about Kabbage fees.
We get it. Being in this position is scary on top of scary. If your business wasn’t already going through a rough patch, you wouldn’t have trouble paying your taxes…and then the tax bill comes to pile worse financial trouble on top of what you’re already dealing with.
But, keep in mind you’re far from the first business to have this problem. The IRS has systems for helping you meet your tax obligation, and businesses like Kabbage and your credit card provider have programs specifically for this all-too-common springtime misery.
So don’t panic. File your taxes. Find a solution. Then figure out how to shift your business into overdrive so you won’t have this problem again next year.