Do I Have to Pay Taxes on Freelance Work?
Freelance taxes and side gig taxes are complicated with so many forms to track and receipts to record. This guide helps you navigate tax season.
If you used a tax extension to put off filing, the deadline is October 15th, 2019. If you can’t pay your taxes, here are three solutions you can use instead of hiding.
Between more Americans picking up freelance work and side gigs and tax withholding adjustments from the Tax Cuts and Jobs Act, millions of taxpayers are facing bills from the IRS this year. If you’ve run the numbers and realize that you owe the IRS, but you can’t afford to pay, you have filed an extension to give yourself more time to decide what to do. But with the October 15th deadline for extensions looming, now is the time to figure it out before you run out of time completely. Instead of hiding from the IRS if you can’t pay, there are three options you can use.
One common instinct when you realize that you owe the IRS money is to skip filing altogether. But don’t skip filing your taxes just because you can’t pay!
Failing to file makes the penalties that you’ll face much worse. Here’s the difference between not filing at all and filing but being unable to pay:
So, while you will still incur penalties if you can’t afford to pay, those penalties are nowhere near as steep. This is why you want to file your tax returns now, even if you can’t afford to pay the bill with your returns.
In addition to the basic penalties the IRS will assess, you also must deal with interest charges. The IRS charges interest on any balance you owe until it’s paid in full. That means you pay interest on:
Interest on tax debt accumulates daily! This means that a little tax problem can quickly turn into a big tax problem if you don’t deal with it.
The clock on failing to pay penalties and interest doesn’t start from when you finally decide to file your federal income tax return. It starts on April 15, 2019. That’s true even if you filed an extension on time. Once you file your tax returns by October 15, the IRS will retroactively apply penalties and interest starting from April 15. That means that the amount you owe will be higher than what’s indicated on your return. However, as long as you file by April 15th (or October 15th if you have an extension) you will not be charged failure to file penalties!
Ideally, you want to pay your tax bill in full by April 15 to avoid any penalties and interest. If you can’t afford to pay the full amount now, then pay whatever you can afford to pay. Any amount you can put towards reducing your tax debt now will reduce the amount that will accrue interest charges moving forward.
If you can’t pay your taxes, three options can help you avoid facing the aggressive collection actions that you can face from the IRS. Remember, the IRS can garnish your wages, place property liens and levy your bank accounts, all without any court order. You don’t want to just ignore your bill or try to hide from the IRS. The consequences of avoidance can be extremely damaging.
Instead of hiding, you should be proactive and work with the IRS to use one of these solutions.
If you simply don’t have any money available to pay your tax bill, you can file for Currently Not Collectible Status. CNC status is designed to help people who can’t afford to pay their taxes. It’s basically the IRS acknowledging that you can’t afford to pay, so they stop all collection actions until your situation improved.
Keep in mind that this does not stop penalties and interest. However, it will help you avoid wage garnishment and liens, which would make your tough financial situation even worse.
If you can afford to pay at least something towards your tax debt each month, you may want to consider an Installment Agreement (IA). This is a tax payment plan that breaks the amount you owe down into manageable monthly payments that work for your budget.
Installment Agreements allow you to pay off your tax bill in full. Penalties and interest continue to accrue even after you set up the payment plan and start making payments.
The last option is to settle your tax debt for less than the full amount you owe. An Offer in Compromise (OIC) is the IRS’ version of debt settlement. They review your finances with you and determine how much you can reasonably afford to pay back. Then they will either help you set up a payment plan or determine if you can liquidate any assets to pay off the reduced amount in a single lump sum.
If you know that you will owe once you file, the best advice is to get professional help immediately. Don’t wait until after you file your return and receive a bill from the IRS. Be proactive and get help now.
Using this method will ensure you already have a solution ready to implement by the time you file. That will give you peace of mind that you won’t face the harsh collection actions that the IRS can use.
Article last modified on August 7, 2019. Published by Debt.com, LLC