While the IRS has once again extended the filing date for individuals, May 17th will be here sooner than you think. And If you owe money to the Internal Revenue Service, you’re expected to pay that amount in full when you file.
Coming off a challenging year with a pandemic still in full swing can make paying your taxes feel overwhelming—particularly if you filed for unemployment this year or received a stimulus payment.
If you’re wondering, “What if I can’t pay my taxes?” you’re not alone: each year, millions of Americans fall behind on their taxes. We reached out to the experts to find out what you should do if you can’t afford to pay your taxes. Here’s their best advice:
Do I Have to Pay Taxes on the Stimulus Checks?
Here’s the good news: The economic income payment you received in 2020 is a refundable tax credit. Meaning, you do not have to pay any tax on those funds. But you should keep a record of the payment you received for your personal records.
If you didn’t receive a stimulus check in 2020 but are eligible, you can file for a Recovery Rebate Credit on your 2020 taxes. You can file a claim to receive the credit through the IRS.
Do I Have to Pay Taxes on Unemployment?
Here’s the not so good news: If you received unemployment compensation last year, you will have to pay taxes on it — and that includes any extra COVID-19 relief payments.
Different states handle unemployment compensation taxes differently. What you owe will depend on where you live and how much you received. To find the specific rules in your area, visit your state’s tax assessment website.
What If I Can’t Pay My Taxes? Should I Delay Filing?
You should always file on time, even if you owe money and can’t afford to pay the full amount when you file.
“The most important thing to do when you’re struggling to pay your taxes is to not avoid them. The temptation may be real, but it can only hurt you as the IRS will charge interest, and potentially send your account to collections. At the very least, file on time and pay what you can” says John Schmoll with Frugal Rules.
And the experts agree.
“The first thing to remember is: Always file your taxes! It’s worse for you if you ignore the problem and don’t file. So, even if you can’t pay the bill, file,” says Robert Farrington with The College Investor.
If you don’t file and pay the full amount owed on time, you’ll most likely be charged interest penalties. Two penalties generally apply: One for filing late, and one for paying late.
- The penalty for late filing can be as much as 5% of the unpaid tax amount each month, up to a maximum of 25%.
- The penalty for late payment is generally 0.5% of the unpaid tax amount each month, up to 25% of the unpaid taxes.
- If you filed late and are paying late, the maximum amount charged for both penalties is 5% per month.
To keep penalties to a minimum, you should file on time and pay as much as you can when you file. If you can’t meet the April filing deadline, consider requesting an extension—but note that an extension of time to file is not an extension of time to pay.
Can I Pay My Taxes in Payments?
Some people may qualify for up to 120 additional days to pay in full for no extra fee—though interest and other penalties continue to accrue until the bill is paid in full.
If you aren’t able to pay the balance in full within 120 days, experts recommend setting up a monthly installment agreement.
“Contact the IRS. The IRS is generally more than happy to work with you by setting up a payment plan that fits your budget. While you’ll still incur a penalty, you’ll remain in good standing with the IRS,” says Kristin Larsen with Believe in a Budget.
Thankfully, you may be able to set up your payment plan online.
“Go to the IRS website and pick a payment plan. If you owe less than $50,000, it’s really that easy. Once you have selected a payment plan, honor it,” says Jason Howell with Jason Howell Company Wealth Advisers.
You can make monthly payments in a variety of ways, including direct debit from your bank account and payroll deduction. Payment plans come with setup and processing fees on top of the accrued penalties and interest, some of which may be reduced for lower income filers.
What If I Owe Taxes and Can’t Pay Next Year?
Figuring out how to pay this year’s taxes is important—but don’t stop there.
“Look ahead at your tax situation to see if there’s a way to avoid the problem in future years or set aside money in a savings account to help if it happens again,” says Schmoll.
For example, if you’re working as an independent contractor—like driving for Uber or making deliveries for Postmates—your employer probably isn’t withholding taxes from your paychecks, so you might need to make quarterly estimated tax payments. Start planning now and identify ways to make sure your tax bill next April will be manageable.
Next, you’ll have to create a budget and stay on top of the monthly payments.
“You can look at selling stuff you own, getting a side hustle or second job, or even negotiating a lower amount with the IRS.” Robert Farrington, The College Investor
If you aren’t able to pay your full tax liability via the payment plan, you could pursue an offer in compromise. An offer in compromise allows you to settle your tax debt for less than the full amount owed.
No matter what, remember it’s always best to file on time and request an extension if you need to. And most importantly if you’re not sure how to file correctly or how to pay your tax bill, reach out to a qualified tax professional who can help you.