Business taxes make up the lion’s share of tax revenues, which makes any late tax filing an important matter for the IRS.
RELATED: What Happens If You File Taxes Late | Frequently Asked Questions About Missing Tax Deadlines
In this article:
- When Are Business Taxes Due?
- What Happens If You File Taxes Late?
- What Are the Penalties for Filing Taxes Late?
- Why Should Taxpayers File on Time?
Penalties and Other Crucial Information About Business Taxes
When Are Business Taxes Due?
Every taxpayer has their own schedule.
Most individual taxpayers, particularly the self-employed and the employed, file taxes every April 15th or the first business day after if the 15th falls on a weekend.
For those with businesses, the tax schedule is a lot more varied.
Taxpayers incorporated as a:
- Limited Liability Corporation (LLC) must file taxes on the 15th day of the fourth month of the tax year;
- S-class Corporations must file on the 15th of the third month of its tax year;
- Lastly, C Corporations follow the same rule as S-class Corporations, and file on the 15th of the third month of the tax year.
A Limited Liability Corporation provides taxpayers the benefits of having limited liability related to business operations, as well as pass-through taxation that can provide a tax rate, filing, and status different from being a single taxpayer.
An S-class Corporation, on the other hand, simply passes the income or losses from the business to the partners or stakeholders. The stakeholders then report the losses or profits.
A C Corporation basically goes with the corporate income tax. Most corporations found in the stock market classify as a C corporation.
Interestingly, taxpayers can file for a tax extension. Tax extensions can help taxpayers avoid penalties, which if left unpaid can lead to more difficult situations like a tax lien or wage garnishment.
An LLC can apply for an additional five months to file. An S-class and a C Corporation can file for an additional six months.
For business taxes, filing for a tax extension requires Form 7004 for businesses. A 2018 primer on how to fill out Form 7004 can help taxpayers possibly save on penalties and fees.
What Happens If You File Taxes Late?
Missing the yearly tax filing can lead to dire consequences, and the penalties that taxpayers see may be the least of their worries.
For LLC, taxpayers pay a $195 fee for every month that taxes are not filed. The counting starts at the start of the calendar month, which means fees are added early.
The same process is present for S-class corporations. The IRS levies a fee of $195 for every month late.
To clarify, the fee is multiplied first to each month unpaid or unfiled, and then multiplied further by the number of managing partners.
As an example, let us say a business incorporated as an LLC forgot to file taxes for six months and have four managing partners. The fee amounts to $195 multiplied by six, the number of months, and then multiplied again by four, the number of managing partners, which leads to $4,680.
A C Corporation has an interesting calculation for getting a late business tax penalty.
The IRS levies a 5% penalty of the unpaid tax amounts.
For example, if the unpaid tax amounts to $10,000, and it was left for three months, the penalty is $1,500, which is .05 or 5% of $10,000 multiplied by three.
Interestingly, both C corporations and S-class corporations have an additional late filing fee on top of the unpaid tax fees. This fee is another .005, or half of 1%, of the total tax debt.
For example, a C corporation has $10,000 original tax plus $1,500 unpaid tax fee. The late filing fee is .005 of $11,500 or $57.50 for each month.
If the corporation filed late for three months, then the late fee is $172.50. Total taxpayer responsibility is $11,672.50.
What Are the Penalties for Filing Taxes Late?
Two main penalties exist for taxpayers who are delinquent with paying taxes, both for businesses and employees.
Late filing fees and late payment fees.
For regular taxpayers, the late filing fees amount to 5% of the unpaid taxes. The late payment fee amount to .5%.
Under the law, both fees cap at 50%, with both at 25%. However, the late fee is 10 times higher than the unpaid tax fee, which means that strategic taxpayers prioritize filing by overpaying the taxes to minimize tax debts.
Late taxes lead not just to fees but also levies and liens. Solutions include installment plans, offer in compromise and other options that merit their own further discussion.
RELATED: The 3 Types Of IRS Offer In Compromise And Their Eligibility Requirements
Why Should Taxpayers File on Time?
There are five main reasons why:
- The IRS Sends Their Own Version of Your Tax File
- Late Filing of Business Taxes Aggravates the Situation
- Self-employed Taxpayers May Lose All Their Revenue
- FICA (Medicare and Social Security) Benefits May Decrease
- Tax Returns Are Important Documents
The IRS Sends Their Own Version of Your Tax File
Whenever a taxpayer, whether a business, self-employed or salaried, misses the tax deadline, the IRS sends a notice asking for the payment. Together with this notice is a tax form specific to the tax status that the IRS filled out.
This tax file by the IRS may not be something the taxpayers want: the IRS usually uses the previous tax file without deductions and other benefits.
For example, some freelancers may change their status from being a freelancer to a private LLC or even form an agency that operates as a C corporation. That means the taxpayer loses benefits and deduction that comes from being a corporation.
This loss of accurate information can really cost taxpayers quite a lot of money, not only due to the late fees, but also due to lost deductibles. Filing taxes ahead of schedule is important, especially for businesses who may not want an extra expense in the form of tax debts.
Late Filing of Business Taxes Aggravates the Situation
Some businesses, especially the newer ones, try to postpone paying taxes to save on cash outflow. Unfortunately, this just makes the cashflow problem bigger.
First off, paying and filing business taxes late leads to fees. Fees may even balloon to more than the tax debt, like for fraudulent filing.
Secondly, the IRS tax collection methods are costlier than just sending payment. Not only is there the possibility of hiring a costly tax advocate, but also the payment fees for installment plans are present, which can aggravate the tax debt.
Self-Employed Taxpayers May Lose All Their Revenue
The IRS has a special team called the Small Business/ Self-employed which reviews and interacts with small businesses and freelancers.
Usually, self-employed people have higher taxes compared to employees, which means that the IRS will mostly go after small businesses and freelancers through an audit.
How does late tax filing deplete the revenues of the self-employed? The law protects employees, with wage garnishment only reaching 85% of income.
On the other hand, the IRS can garnish or levy the whole income of the self-employed. With just a late tax return, the IRS can garnish the whole income of a freelancer, which can make financial life difficult.
FICA (Medicare and Social Security) Benefits May Decrease
Self-employed taxpayers need to pay the whole FICA contributions (with the employer part of Medicare and Social Security as tax deductible). Being late in paying FICA has dire consequences.
For example, social security benefits that the taxpayer may receive depends on the years that he or she contributed. If a taxpayer is late, the IRS may not consider a year’s contribution as accurate and may have fees that eat through the contributions.
Tax Returns Are Important Documents
Banks love tax returns. Tax returns show financial responsibility, which makes mortgages and loans easier to get.
Self-employed taxpayers use tax returns to show accurate income levels. Since they do not have W-2 or even pay stubs, their tax return may effectively be their official income proof.
Of course, other situations require tax returns. Court proceedings like divorce or child support cases use the tax return as a useful document.
Being late in business taxes can lead to a lot of problems. If payment of these taxes is difficult, filing is still recommended, as taxpayers can negotiate with the IRS to make tax payments easier.
Have you ever been remiss in filing your business taxes? Did you find this article helpful? Please give us your input in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.
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