Common IRS Tax Penalties That Virtual Employers May Face

Running a small business is tougher than it sounds. You may face challenges that are as complex as the ones that large enterprises come across. Complicated tax reporting is probably one of the tops of the challenge checklist. Since managing accounts and taxes is so complex, there are chances of running into trouble with the IRS once or more. While you can expect an audit notice from them, penalties and interest are the other aspects you cannot ignore.

Penalties, in particular, can get your small business into a bug fix. Even worse, you may face one just because of a lack of awareness. So wouldn’t it be better to be aware of the common ones so that you can sideline them in the first place! Of course, it definitely makes sense to do things right because many of these penalties are avoidable. Here is a list of the most common IRS tax penalties that small businesses often come across.

Penalties for unpaid payroll taxes

Small businesses are responsible to pay employment taxes as employers. Essentially, they need to collect, report, and pay the payroll taxes in accordance with federal and state laws. These include income tax, Federal Unemployment tax and FICA (Social Security & Medicare). If you have employees, it is your responsibility to withhold the income tax and FICA from the paychecks of individual employees and send it to the IRS every month. Not doing so is another reason why you may get penalized.

Late filing penalty/failure to file penalty

The IRS has specific deadlines for filing tax returns, which is the first step that businesses need to take for being regular with taxes. No matter what the size of your business is, you always need to file your tax returns on time. Of course, the IRS will penalize you if you don’t stick to tax filing deadlines. Not doing so can get you in trouble and at the same time, this is one of the easiest penalties that you can avoid. This penalty is charged at 5% per month and can reach a maximum of 25%. Even if you are not in a position to pay your tax, you should still file your returns on time.

Late payment penalty/failure to pay the penalty

Missing deadlines for tax payments is an equally serious offense. Perhaps the most common penalty for small businesses comes by missing the deadlines for tax payment. If you skip the deadlines, you will obviously have to make up. The IRS will charge you a failure to pay penalty at .5% per month on the outstanding balance. You can cut it down to .25% per month by entering into an installment agreement to repay the taxes owed that you owe to the IRS. On the other hand, you can expect it to increase to 1% per month if the IRS issues a notice of intent to levy. The maximum for this penalty can reach up to 25%.

Penalty for underpayment of estimated taxes

Another time that you will have to pay a penalty to the IRS is when you underpay your estimated taxes. Expect one if you fail to pay up at least 90% of the current year tax bill. The best way to deal with this penalty is by seeking the services of tax attorneys as these guys can appeal IRS penalties on your behalf and even work out a settlement with the authorities. The IRS prefers to get back the payments in equal installments and may still charge a penalty if you pay less early and repay the remaining later.

Penalty for inaccuracy on tax returns       

The accuracy of the tax calculations matters the most to the tax authorities. Another common penalty that small businesses face related to errors and inaccuracy on your tax returns. You will be charged a penalty whether the error is due to negligence or you make an understatement of the taxes owed deliberately. The IRS will charge as much as a 20% penalty in such a case. You can expect it to come after an audit if you are unable to prove the tax deductions you claim or fail to report all the income in your returns.

Tax fraud penalty

One of the most serious forms of IRS penalties is the tax fraud penalty. Tax frauds are intentional and always have serious implications because your intention is to evade owing to the government. If the IRS proves that a small business has under-reported its income or filed the taxes with the intention of committing tax fraud, it can get into big trouble. They will charge a heavy penalty of 75% on the underpayment amount. Tax fraud penalties come because of wrongdoing and you must be absolutely honest and accurate with your taxes if you want to avoid them.

Penalties for unpaid payroll taxes

Small businesses are responsible to pay employment taxes as employers. Essentially, they need to collect, report, and pay the payroll taxes in accordance with federal and state laws. These include income tax, Federal Unemployment tax and FICA (Social Security & Medicare). If you have employees, it is your responsibility to withhold the income tax and FICA from the paychecks of individual employees and send it to the IRS every month. Not doing so is another reason why you may get penalized.

Now that you know all kinds of IRS penalties that your small business may come across, it will be easier to steer clear of them. Avoiding trouble with the IRS is the best thing to do because you should focus on growing your business rather than resolving such issues.