Can I borrow to pay my business tax bill?
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Dear Your Business Credit,
My freelance business grew a lot this year, and I failed to pay the quarterly taxes for my LLC, so I'm going to have to pay the whole years' worth of taxes all at once in April. Are there business loans for paying taxes? Or can I pay them with a credit card? -- Worried
When taxpayers are facing a tax bill they can't pay, the Internal Revenue Service recommends exploring options such as taking out a home equity loan or using a credit card, which usually will cost you less than the interest and penalties Uncle Sam charges for late payments.
You didn't mention owning a home, but if you do, I would try to avoid using a home equity loan in situations like this -- unless you have no other options. Many people got hurt by borrowing against their home equity during the housing crunch. When housing values dropped, they ended up owing more than their homes were worth. Although the economy has improved since then, it's hard to predict what will happen in the future.
If you have a high credit score, you probably have enough time to apply for a business credit card offering a 0 percent teaser rate. Paying your IRS debt with a card such as this could help you devote as much money as possible to paying down the balance on the tax charge, not interest.
Another possibility to consider is borrowing a small amount from several family members. For instance, you can apply for a short-term bridge loan through the peer-to-peer lending site Prosper and friends and family can participate in the loan. In creating the loan description on Prosper, you must indicate why you are borrowing, and "taxes" is one of the options in the pull-down menu.
Of course, the less money you borrow to pay your taxes, the better. Loading up your credit cards can hurt your credit score. And it will be harder to stay current on your 2014 taxes if you have to make big monthly payments to pay down your debt for 2013.
Set aside a couple of hours this week to figure out ways to improve your cash flow and maximize your deductions, to reduce the amount you need to pay -- and borrow.
Maximize your deductions. Even small deductions can add up, so work closely with your accountant to find every possible item you can claim this year. The IRS publishes a business deductions guide that may give you some ideas for deductions you hadn't considered. For instance, if you borrowed money for your business, you can deduct the cost of interest.
There's a change this year, too. If you drove your car a lot for your freelance work, you may be happy to know that you will get a bigger deduction this year. The standard mileage rate rose to 56.5 cents per mile, up from 55.5 cents per mile in 2012.
Get paid faster. Finish your current projects on time and invoice as soon as you have the client's approval to do so -- ideally when each job is completed. Pitch new projects to clients who have a history of paying you quickly, so you can get more money flowing into your bank account. Haven't kept track of who pays fastest? Your accounting software may have a feature that lets you create a report on your clients based on "time to pay," with the click of a button.
Also check on the status of any late invoices with clients. It could be that some of them went astray. You'll be better off re-submitting them now than later. If you dread collections, consider hiring a "virtual" personal assistant -- an administrative assistant who works from his or her own office -- for an hour or two a week to contact your slow-paying clients on your behalf. Chances are, one of your peers knows and works with someone who is trustworthy.
A final note: If you have been spending money you should have been putting aside for taxes, it's time for a fresh start. Not being able to pay your taxes means you are living beyond your means, and you need to overhaul your personal finances.
Freelancers who are transitioning from life as a W-2 employee may need some help from a financial pro to learn how to manage money so they can stay current on their taxes. Without having an employer deduct taxes regularly from your paycheck, it's easy to fall behind on paying the IRS.
Some freelancers' and professional organizations offer discounted access to a financial planner. Setting up a session with one can be an excellent investment, making it possible to enjoy the freedoms the freelance life offers -- without running into financial problems that keep you awake at night.
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