How Small Businesses Can Avoid Common Tax Penalties?

When you operate a small business, you know you have a lot of responsibilities and tasks to manage all by yourself and that increases more uncertainties. Apart from other critical responsibilities, when it comes to tax filing, you need to get extra careful as any single error may cost you a fortune! Thus, avoiding any costly penalties and audits from the IRS (Internal Revenue Service) is extremely crucial. No matter whether you have the best planning, it’s quite possible to miss a deadline. What then?

How Small Businesses Can Avoid Common Tax Penalties.jpg

Here are some of the biggest and most common tax issues and penalties that employers frequently face:

Failure to Pay Tax by the Due Date

This penalty applies to any part of unpaid federal tax by the payment due date. Generally, IRS imposes a failure-to-pay penalty of ½ of 1% of the unpaid taxes for each month. Although, if there is a reasonable cause for late payment, the IRS may waive the penalty. Late payment penalty cannot exceed 25% of the net amount of due tax.

Failing to File a Tax Return by the Due Date

This penalty applies to any part of unpaid tax by the payment due date and the tax return is filed after the filing due date. The calculation is done based on the time from the tax return deadline, including extensions, to the date when tax return is actually filed. The penalty ranges from 5% for each month of late tax return filing to a maximum penalty of 25%. Penalty can, however, be waived off at IRS’ discretion if the taxpayer has a reasonable cause for late filing.

Interest on Taxes to be Paid

Interest is usually added to any tax owed (unpaid) from the time of payment due date to the actual payment date. Interest rates are variable and set by the IRS every three months. At present, the IRS interest rate for any of unpaid tax is 3% per year and is calculated for each day the balance is not paid in full.

Taxes are often a challenge for many small business owners, and the penalties for non-fulfillment of the mandates are even more hazardous. But, with proper planning it becomes easy to avoid the penalties aforementioned.

Related – 7 Mistakes To Avoid When Processing Payroll!

Here are a few tips to avoid penalties:

# Start by onboarding the right professionals who can handle reporting effectively

Business owners usually spend too much time in managing their taxes every year. Some even believe that the administrative burden in preparing and filing taxes is way worse than actually paying the penalties. Thus, to reduce this burden, make sure that you have the right professional help from the domain experts.

# Obtain a copy of the Circular E (an IRS Publication) and use it to minimize exposure to legal ramifications

Circular E, Employer’s Tax Guide, also known as Publication 15, is an annual IRS publication that includes definitions of commonly used payroll terms, rules and regulations for filing of federal employment taxes and tables displaying percentage method and wage bracket federal income tax withholdings. Consider this document as your bible to align with the IRS requirements.

# Understand your business’s entity type and fiscal year to avoid consequences

In order to lower the risk of exposure to hefty penalties, you need to have complete understanding about your business’s fiscal year, your business entity type and usage of a calendar. According to these specifications, the tax mandates differ; like for example, if your company is incorporated, then tax return or extension is due for 2 and ½ months once your fiscal year ends. In the same way, if the entity type is partnership, sole-partnership or LLC, the taxes or extension is due for 3 and ½ months after the fiscal year ends.

# Paying and Filing taxes on time

Tax penalties can easily add up if not taken care of, but are not unavoidable. Mark your calendar long before the due dates roll around to avoid facing missed deadlines and penalties. Also make sure that all the individuals responsible for handling taxes in your organization are aware of these deadlines and properly abide by them.

Along with these, keep a detailed record of all tax related transactions in order to make claims on the tax returns. And most importantly, don’t hide anything from the IRS. An audit has made many small businesses to shut down either due to unreported income or extremely high penalties for fraudulent data.

By being aware of these frequent taxation mistakes, you can easily avoid paying hefty penalties and save more money, which means more finances to reinvest in your fast-growing business.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s