United States
Updated: August 31st, 2023
Paying taxes is an inevitable part of owning a business, but it might prove more difficult some years than others. If you just finished undergoing office renovations, for example, or if business has slowed down over the last couple of quarters, you may be short on cash.
No matter how strapped you are, though, skipping out on your tax bill is never a smart move. You can face penalties from the IRS for failing to file your taxes on time, failing to pay them in full, or failing to pay estimated taxes throughout the year. On top of paying penalties for these mishaps, you may also have to pay interest on your unpaid taxes.
Delaying — or else evading — tax payments can drag you into debt, damage your credit, and put your assets at risk. If you’re struggling to pay your taxes this year, consider financing solutions.
These six common options may help put you in a better financial position. Keep reading to learn more, and make sure you consult a professional before making any decisions.
If you need extra time to pay your taxes, you can apply for a short-term or long-term payment plan with the IRS. Short-term plans, which last 120 days or fewer, are available to individuals, while long-term plans, which can exceed 120 days, are available to both individuals and businesses.
Your payment amount depends on how much you owe, which plan you choose, and whether or not you opt to do automatic bank withdrawals. Long-term payment plans include a setup fee ranging anywhere from $31 to $149 depending on the plan.
If your business owes less than $25,000 in combined tax, penalties, and interest, you can apply for a payment plan online. However, if you owe more than $25,000, you’ll need to mail in the necessary paperwork and pay in installments.
Keep in mind that signing up for a plan could lower your failure-to-pay penalty, but you still have to pay interest on whatever remains unpaid.
Traditional bank loans offer some of the most affordable interest rates — usually between 6% and 10% — but they can be difficult to qualify for. Not only do you need excellent personal and business credit, but you also need a substantial amount of time to dedicate to the application and funding process.
After you gather and submit the various financial documents required, including profit and loss statements, bank statements, and tax returns, you may have to wait up to 90 days to receive a response.
This means depending on when you start the financing process, you may not receive the green light — let alone the funds — in time to pay your taxes. However, if you’re preparing several months in advance for tax season and have a solid backup solution in place, applying for a bank loan may be worth it to see if you qualify for lower rates.
Invoice factoring, which involves selling your outstanding invoices in exchange for a lump sum upfront, can be a great option if most of your cash flow is tied up in accounts receivable. To apply, you usually just have to provide your credit score, bank statements, and invoice details.
Most factoring companies give you about 85% of your invoice total upfront, and charge a factoring fee that ranges from 8% to 30% per month. Though the funds can come as quickly as one day later, you may end up paying a substantial amount of money in monthly fees, especially if your clients take a while to pay you.
Using a business credit card to pay for your taxes can work well if you have guaranteed funds — from a big customer order, for example — coming in within a couple of months. With a business credit card, you have access to a certain amount of available credit that you can use repeatedly as long as you pay it down. Come tax time, you can charge operational expenses to your business credit card and pay for your taxes with whatever cash you have.
Applying is fairly easy and usually just requires you to fill out some information online, including details about your business and annual revenue. Depending on the lender, you could hear back either right away or within a few days. If you have great personal and business credit scores, though, you may get approved quicker.
Less than stellar scores, however, can make it more difficult to obtain a business credit card or can result in a lower amount of credit. Business credit cards may also have smaller limits other funding options — the average limit is around $56,000 — and could have higher APRs as well, averaging around 14%.
To avoid accruing interest and taking on more debt, aim to repay your credit card balance in full within the 30-day payment cycle.
A business line of credit gives you the flexibility to cover short-term financing needs, whether that involves paying your taxes or supplementing ongoing expenses. Like a business credit card, if you’re approved, you get access to a set amount of money that you can use repeatedly as long as you pay it down.
Depending on the lender, the application process for a business line of credit can be straightforward and simple, or more involved. If you use an online lender, you can usually get funds within a couple of weeks, whereas applying through a bank or the SBA may take a couple of months. The average APRs fluctuate as well, ranging anywhere from 8% to 80%, depending on the lender.
With a line of credit, though, you only pay interest on the amount of money you use, making it a good option if you have some money socked away to pay your taxes, but just need a little extra cash.
Alternative lending is typically a faster, more accessible financing option than traditional bank loans. If you can’t afford to dedicate hours to the application process, or if you need to pay your taxes within a couple weeks, an alternative lender may be your best bet.
Applying for a term loan at Funding Circle, for example, takes just 10 minutes, and you can receive a decision in as little as 24 hours after document submission. Terms are flexible as well — you can borrow for a period of six months to five years, with competitive interest rates. Plus, there are no prepayment penalties ever, so if you free up your cash flow after paying taxes, you’ll only pay interest on the time you borrow.
Before you move forward, it’s crucial to carefully evaluate all your financing options. In addition to weighing the pros and cons, it’s a good idea to compare the APR of each option. After all, the goal isn’t simply to pay your taxes — you also want to run a sustainable business going forward. High interest rates or unfavorable terms can rack up your debt and potentially leave you in a worse financial position.
No matter what you’re considering, make sure you consult a tax professional first. A CPA can review your finances and help determine the best course of action for you and your business.
Funding Circle believes informed consumers are better consumers. We strive to provide informative and educational content useful for you and your business. However, please note that tax laws and regulations are complex and subject to change. We strongly recommend consulting your financial or tax professional regarding your specific circumstances.
Paige Smith is a content marketing writer who specializes in writing about the intersection of business, finance, and tech. Paige regularly writes for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.
Get our latest news and information on business finance, management and growth.
