As a new mom, I’m late for everything. Dinner. Family gatherings. Doctor appointments.
But there’s one thing I’m not late for—filing my taxes.
Here’s why: The IRS charges a penalty for not filing your taxes by the deadline. You can also face a hefty penalty if you miss the payment deadline.
The good news is that you can avoid these penalties with some careful planning and know-how. Here are 11 things you should know about the IRS’s late penalties.
Let’s say you get busy and forget to file your taxes by April 15, 2020. If this happens, the IRS will slap a fee on your unpaid taxes. This amount is charged on a monthly basis for the full month, even if you’re under 30 days late.
But let’s say you filed but didn’t pay your taxes by April 15, 2020. If this is the case, you’re not in the clear either. You’ll get fined too. To avoid fees, get a head start in January, file your taxes, and then pay them right away. This way you won’t deal with late mail, distractions, and other reasons to be late.
Beware: the IRS charges a higher fee if you file late than if you pay late. That’s why it’s so important to file your small business taxes on time every year, even if you can’t pay all of the taxes you owe right away. The failure-to-file penalty is normally 5% of all unpaid taxes you owe. This fee starts accruing the day after the tax filing due date. This means the IRS will charge you even if you’re a few days late.
The good news is the fee won’t exceed 25% of your unpaid taxes. But, that’s still a lot! Trust me, you don’t want to ever owe a fee that high. The best thing is to mark your calendar and just file your taxes on time.
Look, the goal is to avoid fees altogether. But I know what it’s like to be financially strapped. If you have to pay your taxes late, the IRS will charge you less than if you file them late; the fee is just 0.5% to 1% of what you owe.
Just like the failure-to-file penalty, the late fee starts accruing the day after the IRS’s deadline. If you can’t avoid paying late, do your best to pay as much as possible on time. This way, you can minimize interest and penalties. You can also work with the IRS on flexible payment options, like a loan or an installment agreement. Sure, the IRS’s fees are tough, but generally speaking, they’re very reasonable and want to work with you on a payment solution.
Things up come. Life happens. The IRS gets it.
If you absolutely cannot file your taxes on time, you can always request an extension. To do this and avoid the late penalty, you’ll need to pay at least 90% of the taxes you owe with your request. If you get all of your ducks in a row, you can successfully avoid the 5% fee. But, keep in mind, you’ll need to pay the remaining balance by the extended due date.
Let’s say the IRS slaps you with a 5% failure-to-file penalty AND the 0.5% failure-to-pay penalty in one month. The good news is you’ll never have to pay more than the 5% fee. That’s because it’s the maximum penalty amount.
That being said, you’ll want to move quickly to file and pay the rest of your taxes soon.
Here’s the rule once 60 days after the tax due date has passed—or the extended due date has passed. No matter how much you owe in taxes, you’ll have to pay a minimum of $135 or 100% of the unpaid tax (whichever amount is smaller).
All things aside, the IRS is very understanding when small business owners and sole proprietors can’t file or pay their taxes on time—and have a good reason why.
The truth is, anything can happen. If you can prove that you tried your best to file or pay on time, but circumstances beyond your control prevented you from doing so, you’ll be in the clear. Remember to document as much as you can. The more proof you have, the easier your case will be.
Sidenote: If an unforeseen circumstance does happen, like an injury, accident, or loss, you’ll want a good business insurance plan. Depending on your line of work, investigate a general liability plan to help cover costs associated with third-party accidents, property damage, and bodily injury. If you have employees, you might want workers compensation insurance, and if you work for yourself, check out a professional liability plan to protect you against legal fees and claims.
Maybe you’re due for a refund. If that’s the case, you have up to 3 years after the IRS tax due date to file your taxes. The IRS will hold your refund and allow you to apply tax credits, like the Earned Income Credit, up to a certain point. Then it’s lost. Three years should be plenty of time to file your return.
If you own your own business and don’t file a federal income tax return, you’re not reporting your income to the Social Security Administration. As a result, you won’t get credits toward Social Security retirement or any disability benefits.
You might not be thinking long-term now, but later in life, these types of benefits are key.
When you’re late to file or pay taxes, financial institutions and mortgage lenders/brokers find out. That’s because, whenever you want to buy a refinance a home, or get a business loan, these institutions want to see copies of your filed tax returns. If you don’t have them because they’re late, they’ll probably deny you a loan.
Technology makes it easier than ever to pay the IRS on time and fast. You can connect your bank account to pay directly online (direct pay), do a same-day wire, or pay online with a debit or credit card. There’s even an option to view your account information, including what you owe and your payment history.
If you’re old school, you can always pay with a check, money order, or even cash at a participating retail store . If you have questions about how much you owe, talk to a local accountant for tax advice. You can also contact the IRS directly at 1-800-829-4933.
And, most importantly, don’t forget to use the IRS’s handy tax calculator. It’ll help prevent you from being late in the first place.
I earned a B.A. in Journalism from the University of Wisconsin at Madison (go Bucky). After realizing my first job might involve carrying a police scanner at 2 am in pursuit of “newsworthy” crimes, I decided I was better suited for freelance blogging and marketing writing. Since 2010, I’ve owned my freelance writing business, EST Creative. When I’m not penning, doodling ideas, or chatting with clients, you’ll find me hiking with my husband, baby boy, and 2 mischievous mutts.
Emily writes on a number of topics such as entrepreneurship, small business networking, and budgeting.
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
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