How to avoid or minimize tax penalties for your small business
Few acronyms can cause stress in the way that “IRS” can. Add the word “penalty” to the phrase, and you’ve got the stuff of nightmares for many people. The good news is that as anxiety-provoking as dealing with the IRS can be, it is fairly straightforward. You can avoid many, if not all, penalties and late fees if you keep up with deadlines and make a good-faith effort to make payments in a timely manner. Here are a few of the late fees and penalties to watch out for… and how to avoid them.
Perhaps the most avoidable of the penalties, late filing penalties are incurred when you don’t get your filing or return in on time. These deadlines are set in advance, but be sure to stay up-to-date with any changes, such as extensions to accommodate major events. Platforms like ComplYant can help you track deadlines with custom reminders and calendars to follow your specific tax deadlines. Even if you’re concerned you won’t have enough money saved up to pay the taxes owed, you should still make sure to get your return in on time. Because late filing fees and penalties are separate from late payment penalties, you don’t want to risk incurring both by failing to file because you’re worried you won’t have enough money to meet your tax burden. File on time and get in touch with the IRS to set up an arrangement to pay what you owe.
Penalty for underpayment of estimated taxes
Because the IRS requires that you pay your taxes every quarter, and not at the end of the year, you should get in the habit of on that schedule. Penalties will be incurred if you don’t pay at least ninety percent of the taxes you owe. If you pay quarterly, but you pay less in an earlier quarter and more in a later one, the IRS may still decide you owe a penalty. If you paid the full amount that you owed in the previous year, you should be fine. To be safe, stay on top of estimated taxes and account for any big bumps in income by paying taxes on it in that quarter, and not later, if possible.
|Because the IRS requires that you pay your taxes every quarter, and not at the end of the year, you should get in the habit of paying quarterly estimated taxes.
If the IRS deems that your small business return is inaccurate, they may choose to audit you. If they do, you’ll need to provide proof of all the expenses and deductions you claimed on your return. If you fail to do that, you may be hit with an accuracy penalty, which can be up to 20%. This can be a hefty blow to any small business’s bottom line, so it’s critical to keep good and accurate records of any expenses you’ll claim on your tax returns. Keep receipts, record what they were for, and when the expense was incurred.
Failure to pay penalty
Penalties aren’t the end of it. If you are hit with one and don’t pay it in a timely manner, you’ll begin to accrue interest on the penalties. This is generally .5% a month on the taxes you owe. You can reduce this penalty to .25% a month if you reach out to the IRS and reach an agreement to pay the amount of tax you owe in installments. So while it can be painful to fork over the amount owed, you’ll want to do it sooner rather than later to keep from compounding the issue.
Tax slip-ups happen to even the most capable small business owners. But with the right support and guidance, you can minimize them or outright avoid them. In addition to sound tax advice from a professional, creating a free account with ComplYant can help you stay organized and vigilant when it comes to tax obligations.