Many small business owners don’t realize that avoiding tax penalties is often as simple as paying on time and keeping a good calendar. It goes without saying that knowing how to minimize your tax penalties means that you get to keep more of the money you earn. There’s nothing complicated about filing and paying your taxes on time, but the consequences of not doing so can be expensive.
Below are some tips to get organized and avoid penalties, and details on what happens if you don’t file and pay your small business taxes on time:
- 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.
A 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.
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.
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