For accountants at Gurian CPA, a Dallas CPA firm that serves small businesses, January through mid-April is tax season. It is also tax penalty season. Like many CPA firms, Gurian gets plenty of calls this time of year from frustrated business owners hoping to get professional help so that they do not end up paying the same penalties they paid the previous year.
The IRS perspective allows very little room for compassion when it comes time to enforce tax laws. Get it wrong and a business faces significant penalties. The three penalties most commonly assessed against small businesses are discussed below.
1. The Late Payment/Filing
Though penalties for filing and paying late are assessed separately, they are often lumped together because the two problems typically go hand-in-hand. A business files its taxes late, then subsequently pays late as well. It happens every spring.
The penalty for late filing is 5% per month up to a maximum of 25% of the taxpayer’s total tax liability. Paying late incurs a penalty of 0.5% monthly up to a maximum of 25%. Neither number may seem all that big, but the penalties quickly add up over time.
The best way to avoid these penalties is to file and pay on time. That’s obvious. But things happen. The government understands that, which is why they allow taxpayers to file for extensions. An extension gives a business more time to get its financial house in order before filing. Having said that, an extension does not apply to paying. Taxpayers who file for an extension are still required to pay what they think owe on time.
The IRS does offer a first-time penalty abatement for businesses that fail to file and pay on time. You have to ask for it, and it can only be used once. In addition, the IRS will occasionally show lenience when circumstances out of a business owner’s control get in the way of filing and paying on time. It never hurts to ask.
2. Under Paying Estimated Taxes
Small business owners and contractors are required to pay estimated taxes every quarter. Under paying those taxes could result in a penalty when filing the annual return. As for the size of the penalty, it is determined by the amount of tax still due, when it is eventually paid, and the current interest rate at the time the penalty is assessed.
There are two ways to avoid this penalty. First is to overestimate taxes so that you pay more into the system then you realistically have to. You would get a refund at tax time like everyone else. The second option is to make quarterly payments that, combined, equal your total tax liability from the previous year. Making the payments on time means no penalty for underpayment – but only if you pay the difference by April 15.
3. ACA Penalties
Finally, sole proprietors could still be penalized this year for not having qualifying health insurance in 2018. This is the last year of this penalty, so there is no need to discuss it in any more detail. Suffice it to say that the only way to get out of paying it is to prove that you did not maintain qualifying health insurance in 2018 because it was not affordable in your region of the country and you didn’t qualify for government subsidies.
Yes, it is tax time again. It is also tax penalty season as well. Using a CPA to help you keep track of business finances and taxes is the best way to avoid penalties in the future.