December 7, 2015

3 Pricey Tax Penalties Any Small Business Can Avoid

Taxes

One of the most common questions we get from small business owners is about saving money on taxes. Probably not a huge shock.

Fortunately, there are lots of ways for small businesses to lower their tax obligations. And while some do require more legwork than others, three of the most common tax penalties are also the easiest to avoid. So it’s surprising that so many small business owners miss rule #1 for dealing with the IRS:

File and Pay Your Small Business Taxes on Time

There’s nothing complicated about filing and paying your taxes on time, but the consequences of not doing so can be expensive:

Late payment penalty: typically ½ of 1% of your unpaid taxes, per month
Interest on taxes owed: the federal short-term rate plus 3% with interest compounding daily
Late filing penalty: usually 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty starts accruing the day after the tax filing due date and will not exceed 25% of your unpaid taxes. This is the big one—always file on time or file for an extension.

Know Your Business Entity & Fiscal Year to Avoid Penalties for Missed Deadlines

If your company is a corporation, your tax return or extension is due two-and-a-half months after year end. If your business is a partnership, sole-proprietorship, or LLC, your taxes or extension three-and-a-half months after year end. Don’t worry—we made a chart for you:

Tax deadline calendar helps small businesses avoid tax penalties

If you think you’ll need an extension, file for it as soon as possible—there’s no disadvantage if you end up filing on time, but if you miss the deadline, you’re on the hook for a hefty penalty.

But What Happens if You DO Miss a Deadline?

If you own a small business, you know that the world is highly unpredictable. Even with the best planning, it’s possible to miss a deadline. What then? Believe it or not, you can ask the IRS to waive the penalty. They may choose not to, but it’s definitely worth your time to ask (this is something indinero does on behalf of our clients when the need arises).

We put together an end-of-year tax pack to help you meet your deadlines, get organized, and lower your taxable income.

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Rebecca Wilson

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Summary

This article outlines three significant tax penalties that small businesses can avoid: late payment penalties, interest on owed taxes, and late filing penalties. It details the specific rates and accrual methods for each penalty and clarifies the different tax filing deadlines for corporations versus partnerships, sole-proprietorships, and LLCs. The piece also advises that businesses can request a waiver from the IRS for missed deadlines.

Key Facts

The late payment penalty for small business taxes is typically ½ of 1% of unpaid taxes per month.

Interest on unpaid taxes accrues at the federal short-term rate plus 3%, compounding daily.

The late filing penalty can be up to 5% of unpaid taxes per month, capped at 25% of the unpaid taxes.

Corporation tax returns or extensions are due two-and-a-half months after year-end.

Partnerships, sole-proprietorships, and LLCs have tax returns or extensions due three-and-a-half months after year-end.

It is possible to ask the IRS to waive penalties for missed tax deadlines.

Frequently Asked Questions

What are the penalties for not filing or paying small business taxes on time?

The penalties for not filing or paying small business taxes on time include a late payment penalty of typically ½ of 1% of unpaid taxes per month, interest on taxes owed at the federal short-term rate plus 3% compounded daily, and a late filing penalty usually 5% of unpaid taxes for each month or part of a month the return is late, not exceeding 25% of unpaid taxes.

When are tax returns due for different business entities?

For corporations, tax returns or extensions are due two-and-a-half months after year-end. For partnerships, sole-proprietorships, or LLCs, taxes or extensions are due three-and-a-half months after year-end.

Can the IRS waive penalties for missed tax deadlines?

Yes, you can ask the IRS to waive penalties for missed tax deadlines. While they may choose not to, it is worth the time to ask.