3 Business Tax Penalties to Avoid When At All Possible - Sara Gonzalez
With May 17th behind us (albeit it was just another day for people in Texas, Louisiana, and Oklahoma), We're moving our attention to the planning and optimization portion of our calendar (June 15th is approaching quickly!).
But, before we move on from taxes, let's address an unhappy reality: as a business owner, you have more tax reporting duties than an ordinary person. (Of course, there are several other ways to save money on taxes.)
However, with more responsibilities comes the chance for items to go through the gaps, potentially resulting in IRS business tax penalties and interest costs.
Some of the penalties are basic and straightforward. Others get a lot more complicated in terms of how they're computed.
Of course, the best course of action is for you to simply let us handle everything. After all, this is what we do.
But, just in case you have any doubts about what your IRS filing and payment responsibilities are for your business, let's go through them from the standpoint of the business tax penalties that can be charged if you don't comply.
Partner, fasten your seatbelts. There's a lot in this...
Three Business Tax Penalties to Avoid When At All Possible, according to Sara Gonzalez
“Tell me and I forget. Teach me and I remember. Involve me and I learn.” – Benjamin Franklin
Your Charlotte company may be required to file a variety of tax returns. The specific forms you'll need to file will be determined by your company's legal structure, whether you have employees or use independent contractors, and the dollar amounts of some of the taxes you owe.
The Internal Revenue Code has nearly 150 separate penalties. We'll go over the most prevalent ones you should be aware of in this Strategy Note.
Income Tax Return Penalties are the first business tax penalty.
Your Gastonia business, like you, is required to submit a 1040 return each year for personal income taxes.
If you run a sole proprietorship, your business tax return is Schedule C, which is attached to your personal 1040 tax return. You may owe an Estimated Tax Penalty from your self-employment income if you don't pay in enough tax money throughout the year. You may also be liable to penalties for failure to file and pay, which we'll go over in detail below.
You must file a Form 1065, Partnership Income Tax Return, each year if your company is a partnership. If you don't file this partnership tax return on time, you'll be fined $210 by the IRS for each month it's late, multiplied by the number of partners. After 12 months of late payments, the penalty is increased to the maximum amount.
So, if your company has four partners and you file your tax return 14 months late, your penalty is $210 x 4 x 12 = $10,080. That's a sizable check to send to the IRS for a tax return that usually doesn't owe any money!
But hold on, there's more! The IRS imposes additional penalties for failure to provide these K-1 forms since each partner in the partnership is obliged to receive a Form K-1 from the partnership disclosing their portion of income. This penalty starts at $280 per K-1 and rises dramatically if the K-1 criterion was "intentionally disregarded." The IRS will have a difficult time proving this deliberate disregard, but if they succeed, the partnership could face a penalty of up to $3,392,000.
That isn't a mistake. A maximum penalty of more than three million dollars is possible. Penalties of this nature are extremely unusual, but they do occur.
If your company is a subchapter-S corporation, you must file Form 1120S every year to record the company's income, costs, and other data. The same penalty of $210 per month applies, multiplied by the number of stockholders in the corporation during the year. In addition, if the relevant Form K-1 is not provided to shareholders on time, the same $280 penalty might be levied.
The bottom line is that you must file these returns on time. On a 1065 or 1120S return, there is normally no income tax payable, so you shouldn't be concerned about paying a balance owing. The problem most firms have is that their bookkeeping isn't up to date enough to prepare these returns. We can assist you in getting caught up and filing your returns in order to avoid these severe fines.
Employment Tax Penalties are the second type of business tax penalty.
If your Charlotte business has employees, the payroll taxes you pay to the IRS in regard to those employees are one of the government's primary enforcement objectives. Employment tax debt accounts for more than half of all tax liability payable to the IRS. These taxes are made up of withheld income taxes from your employees, as well as both halves of Social Security and Medicare taxes.
The regularity with which the IRS expects to receive employment tax payments from your firm can differ depending on your total payroll tax due for each quarter during the preceding year. The great majority of small enterprises, however, are required to deposit these taxes on a monthly basis.
A Failure to Deposit (FTD) penalty may apply if your company fails to make the required tax payment. This penalty is rather severe, and it becomes worse the longer you take to pay. The following is the penalty:
- If you're 1 to 5 days late, you'll get a 2% discount.
- If you're 6 to 15 days late, you'll get a 5% discount.
- If you're more than 16 days late and the IRS hasn't sent you a bill, you'll be penalised 10%.
- If the IRS has to track you down for money after sending you a bill, you'll get 15%.
Most firms must also file a quarterly tax return to disclose wages, income tax withholding, and Social Security and Medicare taxes, among other things, in addition to making these usual tax payments. You may be liable to a Failure to File (FTF) penalty of 5% each month, up to a maximum of 25%, if you file this tax return — Form 941 — after the due date.
In addition to these two penalties, the IRS will levy a Failure to Pay (FTP) penalty in addition to the FTD and FTF fines. This penalty will be charged at the following rate:
- The base rate is 0.5 percent every month.
- If you're on a payment plan, the interest rate is reduced to 0.25 percent every month.
- If the IRS has threatened to seize part of your assets and you still don't pay, the penalty will be increased to 1% every month.
The maximum penalty for this FTP violation is 25%. You receive a tiny reprieve if you don't file and don't pay because the FTF and FTP combined cap out at 47.5 percent.
The total of all of these penalties — FTD, FTF, and FTP — can amount to up to 62.5 percent of the tax liability.
On top of that, they add 3% interest on both the tax and the penalties.
Isn't it evident that the IRS isn't messing around when it comes to employment taxes?
Information Return Penalties are the third business tax penalty.
Have you gotten your penalty yet? The IRS has a slew of other penalties to slap on your Gastonia company. Here are two more that you should be aware of.
— If your business employs independent contractors, you must file a Form 1099-NEC for each contractor who receives more than $600 in a calendar year. If you file this report late, the IRS may charge you a penalty ranging from $50 to $270 each 1099, depending on how late you file. This penalty is unusual in that it can be applied to both the copy of the 1099 you're meant to give to the contractor and the copy you're supposed to send to the IRS, thus doubling the penalty.
— If you have employees, you must additionally create and file a Form W-2 for each one, as well as a Form W-3 to reconcile your records with the IRS. Late filing of these documents has the same penalties as late filing of 1099 forms, with penalties ranging from $50 to $280 depending on how late you file.
The maximum punishment for both of these offences is $3,392,000, as previously stated.
Are you certain that you should delegate everything to the pros? Let's discuss about your business filing obligations so you can avoid these and the other 100+ fines the IRS can levy:
To getting things done,
ps. [Much more on Tax Resolution here]
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My goal for today is to make your choices more straightforward.
Start Off on the Right Foot for the 2023 Tax Year