First of all, it’s good business to avoid all tax penalties. It keeps your record clean and avoids a lot of legal and tax hassles. Understanding the three most common tax penalties will help you avoid getting into trouble.
Penalty #1 The Underpayment Tax Penalty
The IRS expects you to pay your taxes four times a year, not just one. They expect you to pay taxes in April, June, September and January. Each payment is for approximately one quarter of the year. If you try to pay your taxes all at once at the end of the year, you will have the underpayment penalty to pay. It can be anywhere from 0.5% to 3% of the taxes you owe.
The main exception to the underpayment penalty is if you owe less than $1000 in income taxes for the entire year.
Many people who are self-employed in San Diego make the mistake of not making quarterly tax payments. They pay their taxes in April like everyone else. The problem is, the IRS tacks on the penalty, which can end up costing you anywhere from a few hundred dollars to a few thousand.
One way to avoid this penalty is to use the safe harbor method. Take the amount of taxes you paid last year and divide it into four equal amounts. Pay each of those amounts in April, June, September, and January as your tax payments. So, if you paid $6000 last year on your federal income tax, you would make payments of $1500 each quarter.
Penalty #2 – The Non-Filing Penalty
The IRS wants to know what you think you made. That is why you file a tax return in April of each year. If you don’t file a tax return, the IRS will charge a penalty up to 25% of the unpaid taxes for the return you didn’t file.
It’s so easy for a sole owner to keep up with everything. Neglecting to file taxes can happen. Make it a practice to get your tax returns done by the end of February so you aren’t trying to scramble last minute to file your returns. Your accounting service will thank you for the early submission.
If the April deadline is looming, and you don’t have time to get your taxes filed, your accountant can file for a 6-month extension so you have until October to file. This helps you avoid the non-filing penalty.
Penalty #3 – The Non-Payment Penalty
If you fail to pay taxes on time, the IRS will penalize you for it. They will impose a penalty of up to 25% of the amount of unpaid taxes. It doesn’t matter if you file an extension either. The penalty applies anyway.
You might get a penalty abatement if this is the first time you had an issue. However, the best bet is to never have this problem in the first place.
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Having your books up to date and being ready to file your taxes early is the best way to avoid these stiff IRS penalties.
If you don’t want to handle your own taxes, you can outsource them to OnTrack Financial today! We are a full-service San Diego accounting and bookkeeping service here to help you avoid paying IRS penalties. Schedule an appointment today.