We’ve previously covered back taxes and how to resolve them, but how do you prevent tax debt? What is Tax Debt? Back taxes are when you owe the IRS, and you either don’t pay your taxes or you pay the wrong amount. If you continue to miss payments, you have tax debt. Tax debt is calculated by subtracting the payment made towards taxes from the total amount owed in taxes. Now that you know what tax debt is, let’s dive into how to prevent it. Pay Estimated Taxes Correctly One of the most common ways businesses rack up tax debt is that they don’t follow the IRS guidelines on how to pay their taxes – namely, paying estimated taxes. Then, when their tax bill comes, they simply cannot pay it. To resolve this, it’s important to follow the IRS guidelines from the very start – or at least as soon as possible. Estimated tax amounts include: the individual’s federal income taxes of 10% to 37% state/municipal taxes up to 13.3% self-employment taxes of 15.3% for self-employed individuals Small business owners are not informed by the IRS and state tax authorities about their failure to pay estimated taxes until after they have filed their year-end tax returns. Unfortunately, by that time, it is too late for them to avoid the estimated tax trap and they find themselves burdened with a substantial tax bill accompanied by penalties and interest that they are unable to manage financially. So how do you prevent tax debt by paying estimated taxes correctly? Maintain Accurate Financial Records Before you can pay estimated taxes correctly, you first need to know how much you’ll pay in estimated taxes. Keep meticulous and up-to-date financial records, including income, expenses, and deductions. Using accounting software can help streamline this process. Working with an accountant and/or tax professional can help ensure you’re calculating deductions accurately and that you’re not missing any other details. Set Aside Funds for Taxes You already know to keep your personal …
Business Back Taxes: An Actionable Guide For SMBs
As a business owner, managing taxes can be a challenging task. The time and effort spent on tax-related matters can take away from your primary focus of running and growing your business. Unfortunately, neglecting your tax obligations can have serious consequences, including accruing back taxes and facing penalties from the IRS. Discovering your business owes back taxes can trigger immediate concern and strain your organization's financial stability. However, it's essential to face the issue with a pragmatic mindset immediately. Ignoring or delaying a response will lead to further penalties, interest accumulation, and possibly civil or criminal actions. This comprehensive guide will explore the various options and resolutions available to businesses that owe back taxes, helping you navigate the process and find a viable solution: What are the Consequences of Owing Back Taxes? When your business fails to file and pay taxes by the due date, it incurs back taxes. These back taxes can lead to various problems and penalties that can significantly impact your business's financial health and future prospects. Some of the consequences of owing back taxes include: Interest and penalties: The longer you delay paying your taxes, the more interest and penalties accumulate. The IRS imposes penalties for late filing and payment, ranging from a minimum of $205 to 25% of the taxes owed, plus interest. Seizure of assets: If your tax debt remains unpaid, the IRS can seize your business assets, including bank accounts, property, and even personal assets if you operate as an unincorporated business. Negative impact on credit: Owing back taxes can make securing lines of credit or loans difficult for your business. Financial lenders often require tax returns for loan qualification, and unpaid back taxes can raise red flags and hinder your ability to access much-needed financing. Withholding tax refunds: The IRS may withhold any future tax refunds your business is entitled to …
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