We talk a lot about tax deductions and credits on this blog. From home offices to bonuses to charitable tax deductions, there are so many ways to help our clients save on taxes! So it can be easy to forget that so many small businesses overpay each year just because they miss their tax deadlines.
The IRS really wants you to file and pay your taxes on time. The penalties for not doing so quickly add up:
1. Late payment penalty
Typically ½ of 1% of your unpaid taxes, per month
2. Interest on taxes owed
The federal short-term rate plus 3% with interest compounding daily
3. 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.
Not all of these penalties are the same. For most businesses, the late filing penalty is the big one. Fortunately, the IRS allows businesses and individuals to file for an extension. This gives you an extra six months to get your books in order, work with a CPA to claim all the tax deductions and credits available to you, and file your taxes.
The tax filing extension is NOT a tax payment extension
By all means, file for an extension. But also pay your taxes by the original deadline to avoid the late payment penalty and interest on taxes owed.
You may be asking yourself, “How do I know how much taxes I owe if I/my CPA hasn’t filed my forms?”
Estimate. And pay what you can. Even if you’re under, you will only pay interest on the remaining balance, and, in certain cases, you may avoid the late payment penalty. But even if you can only pay a small fraction of the amount you owe, you’ll be demonstrating your good intentions.