Some business owners are always able to pay and file their taxes on time every year. It might take a herculean effort and/or a pretty penny to get everything done at the last minute, but they get it done. For other businesses, successfully paying on time, every time is a near impossibility.
The deadline for paying business taxes in the US is the 15th of the third month after the close of that business’ fiscal year (in most cases, March 15th). If you can’t make that deadline, here’s what you need to understand.
Two Kinds of Penalties
The IRS doesn’t really levy “late fees.” Instead, the costs of paying your business taxes late fall into two categories:
- Failure to File penalties, levied for businesses which haven’t filed their taxes by the deadline
- Failure to Pay penalties, applied when a business has filed their returns but has not yet paid all taxes owed
If you fail to file your taxes on time, you will be charged 5 percent of the unpaid taxes for each month or part of a month that your tax return is late. The good news is that this fee will never exceed 25 percent of your unpaid taxes. If John Johnson of Johnson’s Amalgamated Cheese Curder International owed $10,000 in taxes and filed three months late, he would owe Failure to File penalties of (5 percent of $10,000) $500 for each of the three months he was late – $1,500. If he was five months late, his penalty would be $2,500. If he was six or more months late, the penalty would remain $2,500 because of the 25 percent maximum.
For very small businesses, the minimum penalty if you file more than 60 days late is the smaller of $135 or 100 percent of the unpaid tax. This breaks almost all of the rules described above, but is in place so a microbusiness owing $200 or some other small amount is still incentivized to file and pay on time.
If you fail to pay your taxes on time, the penalty is 0.5 percent of the unpaid taxes each month, and maxes out at 25 percent just like the failure to file penalty. If John Johnson filed his taxes on time but didn’t pay on time, his Failure to Pay penalty after three months would be (0.5 percent of $10,000) $50 for each month, or $150. At five months late, it would be $250. He would still accumulate additional Failure to Pay penalties in months six through 50, because at 0.5 percent per month, it takes much longer to reach that 25 percent maximum.
It’s hard to pay your taxes before you file them, so most businesses who get hit for Failure to Pay are also getting hit for Failure to File. However, the IRS maxes out the combined penalty at 5 percent. That means the Failure to Pay penalty is still there, but isn’t actually charged unless you reduce the Failure to File penalty through negotiation or other means. If you do reduce the Failure to File penalty, your bill will then include the Failure to Pay penalty resulting in a higher bill than you might have expected.
File Early, File Often
The best way to avoid paying these fees is to file and pay your taxes on time. Since every business always qualifies for an automatic extension just by asking for it, some accountants and tax attorneys recommend always filing for that extension during the first week or two of a new fiscal year. This gives you that extra time whether or not you end up needing it.
Reducing the Fees
If you absolutely can’t get everything together by the tax deadline, there are ways to minimize how much that late filing costs you. According to our expert advisors and information provided by the IRS, any of the following strategies can keep your penalties low:
- File Even If You Can’t Pay – The Failure to File penalty is 10 times the size of the Failure to Pay penalty. If paying $50 for every $500 of potential tax penalties sounds good to you, file your taxes on time and then worry about how you’ll be able to pay them.
- Make Partial Payments – Since all the fees are based on the amount of unpaid tax, paying what you can means paying less than you would otherwise. Also, if you file for an extension and pay at least 90 percent of what you owe, the IRS may choose not to levy the Failure to Pay penalty on the remaining balance.
- Show Reasonable Cause – The IRS can choose not to levy any penalties if you show a reasonable cause for not filing or paying on time. If a natural disaster, theft of your records or other extraordinary circumstance is why you can’t pay on time this year, start that conversation with the revenue agents.
- Negotiate, Negotiate, Negotiate – Contrary to popular belief, the IRS is not in business to ruin your day. It’s actually pretty easy to negotiate down your penalty if you agree to pay your taxes owed in good time. Always remember there is no additional “Tried To Negotiate” penalty, so the worst case outcome for asking is identical to the outcome for not trying to negotiate.
Kabbage is an expert of providing small business loans and lines of credit, not tax law. Nobody involved in this project is a tax lawyer or IRS revenue agent. Since the penalties for making the wrong decision with your taxes are potentially steep, we recommend you talk with your accountant or tax attorney about any serious questions.
If you find you need a little extra cash to pay your business taxes on time and avoid the penalties listed above, Kabbage has your back. Our lines of credit for small businesses are easy to apply for and usually hit your bank account within 24 hours of approval.