6 Typical IRS Tax Penalties on Small Business Owners | Don Thomas CPA
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6 Typical IRS Tax Penalties on Small Business Owners

tax preparation

You work hard as the owner of a small business. Small business owners have to wear a lot of hats. You have to keep on top of everything from inventory, to hiring employees, to advertising. On top of all your other responsibilities you also need to keep the books and pay the taxes. This brings up a whole series of challenges as you contend with common business tax problems. It is important to be aware of common small business tax penalties and get help with IRS tax problems.

Common Business Tax Problems

Taxes become very important to pay close attention to when you own your own small business. Salaried employees generally don’t have to worry that much about taxes. Their taxes are deducted from their paychecks and their deductions are usually more straightforward. For those who are self-employed and own, small businesses must save the money they will need to pay their taxes and know how to take the proper business deductions. That creates a number of common tax issues for SMBs and raises the chances of tax penalties. In this article, we will look at six common IRS tax penalties on small business owners.

1. Failure to pay penalty/late payment penalty

This one is among the most obvious small business tax mistakes. If you don’t pay your taxes or pay late there will be a penalty. The penalty for failure to pay is .5% on the outstanding balance of your taxes. You can enter into an installment agreement and have that reduced to .25% a month. You may also receive a notice to levy and find the penalty increased to 1% a month. The maximum penalty is 25%

2. Failure to file penalty/late filing fee

This one is one of the common tax issues for SMBs that is quite easy to avoid. You will want to avoid it because it is one of the largest penalties. It is incurred when you owe taxes and don’t file by the due date. The penalty is 5% a month and can go up to 25%. It is critical that you always file on time even if you cannot pay your taxes. The penalties for not paying are a lot less.

3. Penalty of underpayment of estimated taxes

Another one of the most common small business tax penalties is charged for underpayment. For the current year’s bill, you must pay at least 90% of what you owe to avoid this penalty. It is best to pay what you owe in equal installments. The IRS may still charge a penalty if you pay less at first and then more later. It will not charge a penalty if you pay 100% of the previous year’s tax bill in equal quarterly installments or 110% if you make over $150K.

4. Trust Fund Recovery Penalty (TFRP)

One of your responsibilities as a small business owner with employees is to withhold and pay trust fund taxes (aka payroll taxes). Failure to do so will incur small business tax penalties. Payroll taxes include income tax, FICA (Social Security and Medicare), and the Federal Unemployment tax. You must withhold the first two from the paychecks of each of your employees and send the withholding to the IRS every month. An employee can be held liable for “willfully” failing to pay these taxes but it is your responsibility as a business owner to make sure they are paid. The TFRP is equal to the “unpaid balance of the trust fund tax”.

5. Accuracy related penalty

Accuracy counts and you will want to avoid small business tax mistakes that result in an inaccurate tax return. The IRS will charge a 20% penalty if there is a finding that you substantially underestimation the taxes you owe or if there were an error made on your tax return that was the result of negligence. This penalty will be incurred after an audit if don’t report all your income or you can’t prove your deductions.

6. Tax fraud penalty

It should go without saying that you shouldn’t commit tax fraud. It is one of the most, if not the most, serious small business tax mistakes. The IRS deals harshly with fraud. It charges a penalty of 75% on the underpayment amount if it finds that filed your tax return or didn’t fully report your income with the intent to commit fraud. You can avoid this penalty by being honest and as accurate as possible when filing your taxes.

Click here to schedule a free consultation with Don Thomas – One of the leading tax problem resolution CPAs in Orlando, Florida.