I’m self-employed and have cash flow issues. I don’t have enough money to pay my taxes. Sound familiar? You’re not alone. In 2013, more than 3.8 million taxpayers found themselves in exactly the same position, but it doesn’t have to mean the end of the world. There are people and resources available that can help you deal with the situation.

How you got yourself into this situation is often the result of being unaware (or being in denial) of how your tax liability is determined. We often hear clients express surprise when their tax returns are prepared with comments like: “I don’t understand. I always got a refund in the past, why do I owe taxes now?” or “I barely made any money last year, how could I possibly owe taxes?” All too often, people focus on the amount of the refund or the payment due as being their “tax” as opposed to the actual liability, which is part of the problem.

Did you know that there is more than one tax that applies to you as a small business owner? There is a personal income tax that most people focus on as being the “tax bracket” they are in. Secondly, there is a self-employment tax that is added to your personal income tax.

Here’s where a lot of confusion comes into play. Regardless of the tax bracket you are in, if your net earnings from your business are $113,700 or less, your self-employment tax rate will be 15.3% (tax on the amount over $113,700 is 2.9%). This amount of tax will be due and payable, regardless if your taxable income is zero. How can that be? How can my taxable income be zero if my net earnings show a profit?

Here’s a quick summary of how taxable income, for a typical self-employed pet professional, is calculated.

• Net earnings from your business
• Less: ½ self-employment tax
• Health insurance premiums
• Personal Exemptions
• Standard or Itemized Deductions
• = Taxable Income

Your personal income tax is calculated based upon your taxable income and then the self-employment tax is added to that tax to derive your total tax liability. Now whatever you’ve paid in towards that liability (in the form of estimated tax payments) is subtracted from that number and that’s how much you owe now.

It’s that last piece that can cause fear, stress, and anxiety. What do you do if you didn’t make any estimated tax payments during the year? What do you do if you don’t have enough money to pay the tax? The answer is “Don’t Panic.” Here’s what you can do.

Payment Options Are Available
The IRS offers short, medium, and longer term solutions for taxpayers who can’t pay their taxes by the April 15th deadline.

Short Term
If you find yourself short of cash on April 15th, the IRS provides a 120-day extension of time to pay. This means that you have until August 15th to pay your tax bill in full. You don’t need to file any paperwork with the IRS, it’s automatic, but it’s a good idea to give them a call and let them know what your intentions are.

Penalties and interest will be tacked on but it’s a strategy that can be used when cash flow is temporarily tight. You still need to file your taxes on time, even if you can’t pay. There are additional penalties that apply when you fail to file and that’s not a situation you want to find yourself in. The penalty for failure to file can be 10 times more than the failure to pay penalty. If you are going to stretch your payments out over the 120 day period, you don’t have to make one lump sum payment, you can pay as much as you can afford, at as many intervals as you like, during these 120 days.

Medium Term
If your current and expected cash flow over the next 120 days is insufficient to pay your taxes, and you owe less than $50,000, you can apply for an installment agreement with the IRS. Over the past few years, the IRS has simplified the process through the Fresh Start program and your application is automatically approved when you submit it. All you need to do is to complete a brief online application process and pay a small fee. There are some things you should know though. The fee is reduced if you elect to have the payment direct debited from your bank account ($52 vs. $120) and the total amount due must be paid within 72 months. Penalties and interest will again be tacked on to your bill, but the penalty is reduced by 50% (from .5% per month to .25% per month) if you request the agreement before the 120 days expire.

Longer Term
Offers in Compromise are a way to settle your tax debt for less than the amount owed. However, this is not an easy road to hoe. You will likely need the help of a tax professional and/or an attorney to help you through the process.

Whenever the IRS contemplates a settlement they look to all of the available equity in your assets including your home, your 401K, and any other assets you own that could be liquidated before entering into an agreement. They could for example, require you take out an equity loan to pay down the amount, withdraw your 401K savings, or sell what they term as non-essential assets before accepting an offer by you to pay less than the full amount. But if your financial condition is such that the IRS determines you will be unable to pay the full amount within a statutory period of time, this could be an option for you. An important note here that distinguishes an Offer in Compromise from the first two options is the permanency of your financial hardship. This is not for those suffering from short term cash flow problems. There are also other criteria you must meet, such as having paid all your other payroll and estimated taxes when due and you cannot be in an active bankruptcy proceeding, to name a few. So while this is an option, it may not be the answer for you.

What Else Can I Do?
Certainly looking at various options the IRS offers to taxpayers is one way to go, but you can also think about other things you can do for yourself.

First, planning ahead and paying estimated taxes is the first line of defense from getting hit with a huge bill at the end of the year that you might not be able to pay.

Second, if you owe money at the end of the year, look to borrow the money from a cheaper source than the IRS, such as a low rate or interest free credit card.

Third, budget your money during the year. Put money into a savings account each month for the purpose of paying your taxes. This is often the hardest to do, but if you discipline yourself to live on less than 100% of the income you take in, this can be an effective cash management strategy.

And last but not least, engage the services of a CPA or tax professional who can help you plan, estimate, budget, and find alternatives for you to pay your taxes.

Marie Poliseno is the Managing Partner of Dollars & Scents Accounting Services. She is a Certified Public Accountant (CPA) as well as a professional dog trainer (CPDT-KA) and honors graduate of the SFSPCA Academy for Dog Trainers (CC). To work with Marie on your financial and tax matters, e-mail [email protected] or visit www.dog-pro-cpa.com to learn more about her services.

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