If you’re like most entrepreneurs, you’re probably self-employed and responsible for paying quarterly estimated taxes on income received. If that’s your situation, it’s easy to fall behind. Although the IRS is easy to work with when you want to make payment arrangements, it won’t be a pleasant experience if they decide to come after you for unpaid back taxes. For example, if you fail to pay or file your taxes, the government can employ a range of tactics to get you to pay up.
The following strategies will help you stay on top of your taxes and avoid harsh penalties from the IRS:
1. Save a set percentage of your income for taxes
When your income fluctuates, you’ll owe a different amount of taxes each year. However, for the most part, the percentage you’ll owe will remain the same.
As long as your income falls within the same tax bracket, you don’t need to worry about having to pay a higher percentage of income tax. Although, as your business grows, you’ll eventually move into a higher tax bracket.
To be on the safe side, put aside a set percentage of your income as you receive it. Make that percentage slightly larger than necessary. For example, if you generally pay 15% in income tax, set aside 17% of your income. If you pay too much, you’ll get a refund.
2. Thoroughly understand what the IRS can legally do
The IRS has more power to collect debts than other debtors. According to Michigan Tax lawyers, the IRS can use the following tactics to get you to pay up:
- Fine you. Just because you don’t file your taxes doesn’t mean the IRS can’t find out how much money you’re making. They will use every tool they can to find information about your income and assets, and use that information to fine you.
- Send you threatening collection letters. Threatening letters may not affect you, but you can’t ignore the fact that you owe taxes.
- Wage garnishment. Both the state and the federal government can garnish your wages before you receive your paycheck.
- Bank account levies. The state and federal government can place a levy on your bank accounts and other financial accounts until they’ve collected what you owe.
- Property liens. The IRS can place liens on real property and personal property. With a lien in place, you can’t sell your property until your debt is paid off.
- Jail time. If you fall behind on your taxes, and the government finds out you have enough money to pay your taxes but are just refusing to pay, you can go to jail.
Nobody wants to face those penalties, but if you allow your taxes to slip too far, it’s a possibility. Know what the IRS is allowed to do, so you don’t mistakenly throw away demand letters or ignore phone calls.
3. Set up a monthly installment plan with the IRS
If you owe back taxes, set up an installment plan right away. Even if all you can pay is $100 per month, start paying it now. The longer you wait, the higher your bill will be thanks to fees and penalties.
4. Prepare and file your taxes electronically to avoid procrastination
Software like Turbotax is marketed as a quick way to receive a tax refund. You don’t need to file electronically to receive a fast refund if you file on time with companies like H&R Block or Jackson-Hewitt. However, filing electronically means not having to make an appointment or leave the house. It’s convenient, and you can do it on your own time. Filing electronically will make you less likely to put off filing in the first place
Learn how to prepare your own taxes. It’s not that difficult unless you have an extremely complicated tax situation. The Tax Cuts And Jobs Act of 2017 made the filing process easier for millions of people. Since this act is in place through 2025, once you learn the changes, you should be able to file your tax return on your own.
5. Get a separate bank account for holding your tax money
When you set aside a percentage of your income, place it into a separate bank account. Don’t create the illusion of a bigger available bank balance. Even when you keep track meticulously in a ledger, it’s easy to forget just how much of your balance is reserved for taxes.
You can avoid an increasing tax debt using these strategies
Your tax debt can snowball before you know it. These strategies will help you avoid an increasing tax debt and unnecessary penalties.