Here’s What To Do If You Can’t Pay Your Taxes

There are many annoying things about tax season: the forms, the receipts, the drudgery, not to mention actually getting yourself to file. But the very worst thing? Unexpectedly owing money — and trying to figure out how to pay.

There are plenty of reasons why you might actually owe taxes this year. Maybe you scored a new job halfway through the year and the pay is different, or you manifested a promotion and now you’re in a higher tax bracket. Perhaps you’re living the self-employed or freelance life, or your side hustle earned you more than $600 last year. Whatever the reason, what are you supposed to do if you haven't saved enough to cover what you owe?

First of all, take a deep breath, because you have options. We chatted with Brittany Turner, CPA, tax expert, and the founder of Countless, a New York City–based accounting firm for creatives. She gave us five excellent tips, including insight on how to make sure you don't get caught off guard by taxes in the future.

If you're in a pinch and don't have the cash to pay your taxes in one go, you're in luck: The IRS offers a few different payment plans, including an installment agreement.

The fees vary from free to $130, which will be automatically added to your tax bill, and you can apply when you file your return (Turner notes that it's less expensive to do so online than setting it up with an IRS agent). Note that if you owe over $25,000, you must make automatic payments from your checking account, which is known as a Direct Debit Installment Agreement (DDIA).

The payments can be spread over up to72 months. It’s important to note that when you set up a payment plan everything except for what you pay upfront will be subject to accrued penalties and interest until your balance is paid in full, no matter which one you choose. That also means that if you can pay off some of the debt before the tax filing deadline, it’s in your favor to, because there is less money to accrue interest on during your plan (i.e. you pay less overall).

How quickly or slowly you pay your owed taxes is up to you. But if you get the urge to pay off your debt too aggressively, Turner warns, that could be dangerous as well, because it can put you into a situation where all the money you should be saving for your current year's taxes is going to the prior year. Then you're always behind.

The sweet spot? Turner recommends paying roughly 70% of this year's savings to the current year and 30% to the prior year, so you don't end up in the same situation. "There's no award given for paying it off early," she says. "The interest rates are so low — it's better to get current [with the current year] than to pay off the prior."

If your income situation has drastically changed and there is no way you foresee ever being able to pay off the tax you owe, you can apply for an offer in compromise. In other words, Turner says, "it's like: You know you ain't getting shit from me, let's settle on this."

An example of an applicable situation is if someone had a huge business, made a bunch of money, never paid taxes, lost the business, and is now making a fraction of what they used to. "They aren't the same person financially or tax-wise," says Turner, "so the IRS will take what they can get."

The application requires a non-refundable $205 application fee, as well as a first initial payment. However, these can be waived if you meet low income certification guidelines. After being granted an offer in compromise, you would be put on a five-year probation by the IRS, which requires full compliance in filing and paying all taxes. If you don't meet these expectations, the IRS could default the settlement.

"I have several clients that pay their prior year's taxes with 0% balance transfers," Turner says. But she explains that this option can potentially be dangerous.

Basically, you'd need to open a balance-transfer credit card and transfer your tax payment to it, for which you'd typically pay a fee of about 3%. This is only a good idea if you have very good credit, have a strict payment plan, and have a balance large enough to warrant this need for extra time. If you have less-than-perfect credit, you may not even qualify for a transfer that covers the full amount of your tax bill.

If you're considering this option, Turner recommends exercising extreme caution, as once the promotional period is up, a 0% interest rate will turn into double-digit rates. "It could easily spiral out of control."

We get it — knowing that you may not have enough to pay your taxes is enough to make you drag your feet on filing, but whatever you do: Make sure you still file.

"Not filing is not an option," Turner says, adding that doing so will only cost you more money in the long run. In fact, you'll likely be docked with a failure-to-file penalty, which is 5% of your unpaid taxes for each month your tax return is late.

In comparison, if you file your taxes and do not pay, the IRS will charge you with a failure-to-pay penalty, which is much less harsh: Generally, 0.5% of your unpaid taxes for every month you fail to pay, up to 25%. "The IRS hates when people don't file — not paying is one thing, but there's no reason to not file."

Turner acknowledges that the situation can be stressful for many, but your best bet is to just get it done, so you can figure out if one of the above options applies to your situation, and then pay the amount off in installments. After all, Turner adds, the IRS is there to help you.

"I know they seem scary, but they're actually super helpful," she says. "They know shit happens and just want to help to find a solution. Stay on their good side, and file the damn return, regardless if you can pay it or not!"

Above all, learn from this experience and make sure it doesn't happen again. So what's the best way to do that?

"If you are freelancing or self-employed, it's a good rule of thumb to save about 30-35% of your net income — or what's left over after expenses — for your taxes," Turner explains. "Or, you can save between 10-15% of your gross income, what comes in before expenses."

Turner adds that these are not exact figures, but are a good benchmark for keeping things as under control as possible. A great tool she recommends is QuickBooks Self-Employed, which calculates your estimated tax for you and lets you file them directly from the program.

If you're not self-employed, you should familiarize yourself with tools like the withholding calculator on the IRS website to make sure you are having the correct amount of tax deducted from each of your paychecks. On the flip side, if you would rather have more money now — as opposed to getting thousands back at tax time — the calculator can also help you make sure you aren't withholding too much.

Finally, with taxes, as with life, it's always a good idea to look ahead to any changes you're anticipating and prepare for them. "If you change jobs mid-year and get a bump in salary, you might get pushed into a higher tax bracket, so the amount they are having withheld won't be enough," Turner explains. Same goes for if you're getting married and planning to file jointly. "Just because enough tax is being withheld for that person's salary doesn't mean it will be enough when you put both salaries together."

Information shown is for illustrative purposes only and is not intended as tax advice. Please consult Brittany Turner, or another professional tax preparer, for advice specific to your situation.