If you have a balance due after preparing your tax return, you might need to come up with the money to avoid paying taxes and penalties.
If you’re wondering how to pay the IRS when you owe money, here’s what you need to know.
How to Find Out if You Owe the IRS
The easiest way to find out if you owe taxes is to complete your tax return.
You can either go the DIY route and use an online tax prep software program, or you can hire a tax pro to do your taxes for you.
If you file your taxes using Form 1040 or Form 1040EZ for 2019, you’ll plug in your income, deductions and taxes paid. There are three lines to focus on to determine whether you owe taxes to the IRS:
- Line 16: Total tax liability
- Line 19: Total tax paid
- Line 23: Total amount you owe
Line 23 is the difference between the number on Line 16 and Line 19. In other words, the IRS adds up all the taxes you already paid for the year and then subtracts this from the amount it estimates you owe. The IRS does this based on your filing status, income and deductions. If you didn’t pay enough in taxes to cover what the IRS says you owe, then you’ll have to pay more when you file.
On the flip-side, if Line 19 is more than Line 16, you’ll get a refund and this amount will show up on Line 21a.
Why Do I Owe Taxes?
There are several common reasons you might owe taxes instead of getting a refund or breaking even.
1. You didn’t withhold enough in taxes
If you work a regular job, it’s your employer’s responsibility to withhold taxes from your paychecks. The amount that is withheld is determined by the information you provide on your Form W-4.
Withholding less money in taxes each pay period means you have more take-home pay. But it also means you could end up owing money to the IRS when it’s time to file. And of course, withholding too much money means you’ll get a refund.
If you owe taxes this year and you think it’s because of your withholding, the IRS has a free tool you can use to figure out exactly how much to withhold going forward.
2. You didn’t pay taxes on a side hustle or self-employment income
Starting a side hustle or small business can bring in some extra income. It can also result in a tax bill if you’re not reporting your income properly.
If you have extra income that’s not taxed by an employer, you may need to pay estimated quarterly taxes. Otherwise, you could end up owing money at the end of the year.
3. You had a major life change
Life changes – like starting a new job, getting married, or having kids – can also affect your tax filing and whether you owe money to the IRS. For example, getting a better-paying job can mean you’re no longer eligible for certain tax credits. This may result in you owing more in taxes. Or, you might be phased out of claiming certain deductions based on your income or filing status.
How Much Do I Owe the IRS?
Again, your Form 1040 can tell you exactly what you owe. But that may not be the only money you end up having to pay.
The IRS can tack on penalties and interest if you fail to file your tax return on time or if you don’t pay the full amount owed by the filing deadline. For the 2019 tax year, the filing deadline has been extended to July 15 instead of April 15. This means you have more time to prepare for paying taxes (if you owe money).
If you don’t file on time or pay on time, you could have these penalties added on:
- Failure to pay penalty: If you don’t pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes.
- Failure to file penalty: The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late.
The IRS can also charge interest on unpaid balances owed. The interest accrues continuously until your balance is paid off, similar to the way it does on a credit card.
If you need more time to pay, you can request a tax extension using Form 8868. And if you’ve lost your job or been affected by the coronavirus pandemic, the IRS is offering some tax relief to help. You can learn more here.
How to Pay the IRS When You Owe Taxes
The best solution for how to pay the IRS may be to use funds from your savings account. This way, you can pay on time and you don’t have to create any additional debt to cover what you owe. The IRS offers the Direct Pay option to make paying from your bank account as easy as possible.
But, if your savings account is looking a little thin, there are other options for paying taxes.
1. Take out a personal loan
A personal loan allows you to borrow a lump sum of money that you can use to pay the IRS. If you have good credit, you can possibly score a loan with a low interest rate.
The advantage of using a loan to pay the IRS is that you owe the lender, not the federal government. So, you’re only paying interest on the loan, rather than interest or penalties charged by the IRS.
It’s important to consider the interest rate and fees, however. If you don’t have great credit, getting stuck with a higher APR can make a personal loan an expensive option for how to pay the IRS.
2. Use a credit card
The IRS accepts credit card payments for outstanding tax bills. Using a credit card to pay taxes is convenient and you might even earn some rewards for making the payment.
But there are some downsides. For example, you may rack up interest and have to pay a fee to the IRS for credit card payments. The fee hovers around 2% of the transaction amount, depending on which card processor you use. So, if you’re charging a $5,000 tax payment to your card, it can cost you around $100.
3. Set up an IRS payment plan
If you don’t want to use a loan or credit card to pay the IRS and borrowing money from friends and family isn’t an option, there’s one other thing you can try.
The IRS offers payment plans for people who owe taxes. Setting up a payment plan means paying an initial processing fee.
It’s also important to note that penalties and interest still accrue until your balance is paid off.
Planning Early Can Help Avoid Tax Headaches
If you think you’ll owe taxes, try to put a financial plan in place sooner rather than later.
You can also take steps to avoid the same tax headache next year by checking your withholding at work and paying estimated tax payments for any side gigs. Lastly, understand the deductions and credits you’re eligible for. The more you can reduce your tax liability, the more money you can save toward your financial goals.