Tax Thursdays: Slapped With a Huge Tax Bill? Here’s What to Do
Most people put off filing their taxes to the last minute – not so much out of laziness but out of fear of what’s to come. Small business owners usually have not-so-small tax bills to cover, especially if they don’t prepare for their taxes throughout the year. The question is, what do you do at that point?
My friend Regina faced this very problem the first year she opened her flower shop. She had always worked for other offices in the past, so she wasn’t fully aware of the tax burden that comes with owning your own business. Her profits soared in that first year, and she was making more money than she ever thought possible. That was until she got slapped with a tax bill 5 times what she was expecting.
After going through every stage of stress, panic, and denial imaginable, Regina finally decided to do something about her situation. She talked with a tax advisor about her options, and she was able to work out a plan that she could logically stick to.
Here is a look at some of the steps you can take if you get slapped with a huge tax bill.
Recheck all your numbers
A small calculation error can lead to unexpectedly big debt. The first thing you need to do is recheck all your numbers to make sure you didn’t miss something. Did you add an extra zero somewhere? Did you switch a couple numbers around? Is there anything that just doesn’t add up? If you notice a problem, you can follow some of the other steps below to fix it.
Look for other deductions
If you only had a couple tax deductions this year, you might want to check for others. For instance, Americans who maintain a home office can take a portion of their rent or mortgage payments off their taxable incomes every year. You can also do this with a portion of your internet, phone, and utility bills, representing the percent of the house the office takes up. Talk to a tax agent to see what you might be able to deduct, and then you can potentially cut your bill way down.
File an appeal
If you notice errors in your taxes or missed deductions, you can file an appeal with the government. This works differently in different countries, but essentially you will fill out a form that states what the errors are and why you want them corrected. This is also referred to as an amended tax return. Here are links explaining the appeal process in the United States, United Kingdom, and Canada:
It may take several months for your appeal to be assessed and verified, but eventually you will get a new bill that you will have to pay. If you’re really lucky, you’ll get a notice that you don’t owe any money at all.
Setup a payment plan
If you still end up with a rather large tax bill to pay, you may want to work out an installment plan with the government. This gives you extra time to pay off the bill, but it does come at a price. Like with most payment plans, you will have to pay some sort of interest on your taxes. You may also have to pay late fees, not-fully-paid fees, and a slew of other costs you wouldn’t pay if you covered the whole bill right away. Since most of us don’t have that option though, you may just have to suffer through your installments.
The payments you set up will correspond to what you can afford, so if you can only pay $50 a month, the government will let you do that. Just be careful you’re not paying only the amount that covers interest rates and fees or you’ll never get rid of the principle balance. Instead, pay as much as you can over and above your fees to ensure you get your debt paid off in no time.
Use a credit card
If you don’t want to work out an installment plan, there is another option. You can get a credit card with an available balance high enough to cover your tax debt. Then you can just pay everything off and worry about your credit card when you get to it. Of course, you have to weigh out the pros and cons of paying taxes with a credit card, as it could have an impact on your credit score if you have trouble paying off the balance. At the very least though, this will get the government off your back.
Prepare for next year
Assuming you don’t want a similarly large bill next year, here are some things you can do:
- Pay estimated taxes every quarter. Then when it comes time to file for the year, you already have the majority of your bill paid off.
- Keep track of all your business expenses. You can use these as reductions to lower your costs in the future.
- Donate money to charity. Not only will you be helping those in need, but you will be creating even more deductions to use.
- Have realistic expectations. If you know that your bill is going to be rather high, you can save to be able to pay for it.
No one wants to get a huge tax bill, but the fact is that most small business owners experience that problem. All you can do moving forward is pay whatever you owe and find ways to avoid the same problem in the future. With the right planning, you can manage any taxes that come your way.