Tax season is a stressful time. Not only does it mean possibly paying money to the government, but if a business doesn’t report its earnings correctly, it can lead to consequences — some more serious than others.
Thankfully, with an understanding of your obligations and the rules for filing, you can avoid issues with your returns. These are some of the penalties that business owners can face from the IRS and how they can be avoided.
Image via Flickr by wuestenigel
If you don’t submit your taxes by the deadline, you can be assessed a failure-to-file
penalty. Filing late can lead to a 5% fee on your unpaid taxes. The fine is
increased for each month you fail to pay, capping out at a 25% fine at the
five-month mark. You don’t have to pay your taxes immediately once you file, so
it’s best to file even if you can’t pay what you owe.
Not Paying on Time
The failure-to-pay on time penalty is less severe than the
failure-to-file penalty. If you can’t pay by the deadline, a 0.5 to 1% penalty
can be added to the total you owe. This charge is also applied monthly and
continues to accrue each month after the due date.
Though it’s possible to fix mistakes and move forward without
penalty, filing incorrectly can lead to problems. For example, you might budget
incorrectly and then miss the due date for your taxes. Keep the following in
mind to ensure you file correctly:
- What you need to report: Many businesses forget certain things that they need to report. Double-check your return, and consider an internal audit or working with a third party to check your forms before filing.
- Interest rates: While not a penalty, failing to budget for interest rates can lead to an individual or company paying for far more than what they actually owe in taxes. The total you owe or receive from taxes can depend on the interest rates for overpayments and underpayments. These rates change when new laws are passed regarding business taxes in the United States. You also need to understand how IRS interest rates work — for taxes, interest is compounded annually and assessed quarterly.
- Requirements specific to your business: Tax requirements change based on the type of business you run and how many employees you have, among other factors. For instance, corporations have different reporting requirements and rates than businesses that are run as a sole proprietorship.
Mistakes made with filing incorrectly can be amended or otherwise fixed with minimal hassle. However, they can also lead to delays and other problems with your returns. Even if you aren’t penalized, you may find yourself dealing with paperwork and back taxes when you should be focused on your business.
In many cases, it’s wise to get professional help to ensure the best possible outcome with your taxes. Taxes for businesses can be very complex, even if you’re running a business with no employees. To avoid the penalties listed above, it’s best to stay on top of your financial records thro