20 Feb Tax Penalties for Small Business Owners Explained
Running a small business means that there are plenty of things tax-related you need to know. Many small business owners don’t know about some of the more complicated things, and they end up making mistakes in the filing, or by under-reporting their income, and a lot more.
These things result in their business charged with a lot of tax penalties. If you want to avoid such problems from ever occurring in the first place, you need to know about these tax penalties and how to avoid getting hit with them.
What Are Tax Penalties?
The IRS wants to make sure that every citizen and business owner is paying their taxes correctly. To do this, they resort to the ‘intimidation’ of tax penalties.
They charge these tax penalties when you’re not in compliance with the tax law. There are plenty of these penalties, each for a specific purpose and severity of tax lawbreaking.
These tax fines are problematic, but you can avoid them by filing your taxes correctly and promptly. In many cases, if you can explain what caused any noncompliance, the IRS may forgive the tax penalties, and you’ll only be left with paying what you owed in the first place.
The Most Common Tax Penalties and How to Deal with Them
- Underpaying taxes
In most cases, if you fail to pay at least 90% of what you owe in taxes for a year, the IRS will charge you with a penalty. To avoid getting this common penalty with small business owners, you need to pay 100%, or 110% if you make more than $150,000, of your annual tax. Furthermore, you’ll have to pay that in quarterly installments and on time to avoid a penalty.
- Not filing or not paying
The easiest penalty to avoid is the one you get when you fail to file your taxes correctly and on time. The penalty for such a simple thing can be very problematic – 5% and up to 25% per month. It’s also vital to file even if you can’t pay, because you’ll still get the penalty for not filing in addition to the one for not paying. If you fail to pay, the fine is 0.5% for each month in default, factored by the amount you owe. If you can’t pay everything that is due, you need to explain and pay as much as you can to avoid any penalty.
When the IRS finds substantial errors in your filings, they’ll end up charging you with a 20% penalty. They usually assess this after an audit of your business.
- Tax fraud
Among the harshest penalties is the one charged when you commit fraud. Even if you didn’t try to do it, if the IRS believes you have, they would charge you with this penalty that amounts to 75% of the underpaid amount. If you’re not trying to commit fraud, the penalty is easy to avoid by being accurate and honest with your filings.
If you’re looking to know more about tax penalties, especially about the ones less common that still occur, contact us and we’ll help you and resolve the issues that you might have as well.