I’m self-employed and need to borrow money for a short-term expense. Using a credit card for this expense would be astronomical, and a bank won’t lend me money for only a short time. A loan through a family member isn’t possible. Do I have any other borrowing options? Kathy, California
It all depends on how disciplined you are. If you don’t have the money you need now, but know for sure you will have it in a relatively short period of time to repay a loan, there is a pretty clever way that you can do this. Basically, you are going to treat the IRS as you would a credit card.
As you know, because you are self-employed you must make quarterly estimated tax installments, based on what your business is projected to bring in during the year. Because you have this current urgent need, go ahead and borrow the money you would normally send to the IRS for your next quarterly installment and consider it a loan from the IRS. There you go.
You won’t have to fill out an application, authorize a credit check or pay any loan origination fees. In fact, you don’t even have to get IRS permission. You can make the transaction on your own. Of course, you will still owe the money, and it will not be without cost. But currently the IRS charges a 3 percent “penalty” on tax underpayments. If that’s a penalty, I wonder what they would call the 29.99 percent many banks charge on their credit cards?
You will not find a 3 percent loan anywhere these days, so the IRS option looks quite affordable as loans go. As soon as you can, get caught up with the amount you owe the IRS—and in the meantime, enjoy the ease with which you can manage this short-term fix.
Just to be clear, you will be charged interest (they call it a penalty) based on the difference between the amount you should have paid for each installment and the amount you actually pay for as long as the underpayment remains outstanding.
Borrowing from the IRS in this way is only a short-term fix. If you cannot guarantee that you will get caught up before April 15, 2013, please do not even think about using the IRS as a credit card. Please. You need to know that if you are not caught up by tax day 2013, the IRS will start charging an additional 0.5 percent interest per month on the shortfall, which is 6 percent annually. That’s on top of the 3 percent rate, so you could be looking at 9 percent or even more if the IRS ups the rate. Suddenly, this option becomes less attractive as a short-term solution and more like a long-term problem.