A Complete Guide to Understanding the Implications of Filing Business Taxes Late

A Complete Guide to Understanding the Implications of Filing Business Taxes Late

A Complete Guide to Understanding the Implications of Filing Business Taxes Late

Dealing with taxes is one of those “eat your vegetables” types of activities every business owner faces. Love them or hate them, paying business taxes on time is essential to running a successful and healthy business. 

Here’s how procrastinating on your tax filings can create problems for your business, and proactive steps you can take to avoid those consequences. 

Quick Overview of Late Tax Filing Consequences and Solutions

Failing to file your taxes on time can have expensive consequences. You may be charged a late filing penalty, late paying penalty, and interest. In serious cases, business owners may face civil charges for failing to file, though criminal charges are also possible for tax evasion. 

Depending on your type of business and the way your business reports its income and expenses, falling behind on your business taxes may also affect your personal tax returns, resulting in additional penalties. 

Why You Want To Avoid Filing Past Due Business Tax Returns

It’s expensive to file late, or not to pay at all. As we’ve already mentioned, failing to file and/or pay your business tax returns on time can result in penalties and interest. If the IRS files a tax lien against your business, it will hurt your business credit scores. 

Unfiled tax returns or delinquent taxes may make it harder for your business to qualify for certain types of small business loans. Some lenders, especially traditional banks, may require copies of your business tax returns to qualify for financing. 

It can also create a cascade of other problems. Many business owners rely on information from their business to file their personal income tax returns. If you haven’t filed your business tax return, you may not be able to file your personal tax return and that can separately result in penalties or interest. Filing late can also hold up a personal tax refund if you are owed one. 

Additionally, if you can’t file your federal income tax return, you probably also can’t file your state tax returns, which can include both business and personal tax returns. 

And finally, incomplete tax returns make it impossible to clearly understand the financial health of your business. It adds another layer of stress to the already stressful job of running a small business. 

Benefits of Filing Business Taxes On-Time

While filing tax returns isn’t the most exciting part of running a business, staying on top of your taxes offers a number of benefits: 

  1. Save money by avoiding penalties and/or interest on state and/or federal taxes. 
  2. Budget money for paying your taxes. 
  3. Make it easier to qualify for certain types of financing.
  4. Stay on top of your business finances and financial health. 

Keeping up with your bookkeeping and taxes gives you valuable insights into your businesses’ financial health. Plus you’ll likely sleep better at night knowing where your business stands! 

Understanding the Implications of Filing Business Taxes Late

There are varying penalties and interest for not filing your business tax returns and/or paying your business taxes late. 

Penalty for Underpayment of Estimated Taxes

Freelancers, sole proprietors and others who are self-employed often do not run formal payroll, which means they do not have payroll taxes withheld from their paychecks. In that case, they usually must make quarterly estimated tax payments to pay FICA taxes and federal income tax withholding. Failing to make quarterly tax payments on time may result in a late payment penalty. The IRS will calculate the amount of the penalty. 

You may not have to pay the underpayment penalty if you owe less than $1,000 in tax after subtracting withholdings and credits; or if you paid at least 90% of the tax for they owe for the current year, or 100% of the prior year’s tax (whichever is smaller). High income taxpayers need to pay at least the smaller of 90% of the tax for this year or 110% of last year’s tax to avoid the underpayment of estimated tax penalty. 

If you were a victim of a natural disaster or other unusual circumstances you may also be able to avoid the penalty. 

Unfortunately, the penalty isn’t a set amount or percentage. You’ll use IRS Form 2210 to calculate the penalty as an individual taxpayer. 

Corporations (including S corporations) use IRS Form 2220 to determine whether they are subject to the penalty for underpayment of estimated tax and the penalty for underpayment. 

Penalty for Failing to File Employment Taxes

Businesses with employees pay payroll taxes (Medicare and social security), and withhold federal taxes from employee’s paychecks. These are called trust fund taxes because your employees trust you will pay the money withheld to the U.S. Treasury on their behalf. This is a serious responsibility and failing to properly withhold, report and/or pay these taxes can have serious consequences. 

Penalties. For each whole or part month a return isn’t filed when required, there is a failure-to-file penalty (FTF penalty) starting at 5% of the unpaid tax due with that return, up to 25% of the tax due depending on how late the return is filed. In addition to any penalties assessed, interest accrues from the due date of the tax on any unpaid balance.

If your business must pay employment taxes and does not deposit the required amount on time you could be charged a failure-to-deposit (FTD) penalty. 

Penalty amountCharged for
2% Deposits made 1 to 5 days late
5%Deposits made 6 to 15 days late
10%Deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due OR amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return.
155Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.

You may be able to avoid a penalty if you qualify for a reasonable reason to file or to pay, but this relief isn’t guaranteed so it’s really important to do everything you can to make sure you file and pay payroll taxes as required. 

While not related directly to filing taxes on time, accuracy-related penalties can be costly. These penalties are assessed when you or your business doesn’t pay the amount of taxes due. Underpayment can happen if you don’t report all of your taxable income or when you claim deductions or credits for which you or your business doesn’t qualify.

The IRS warns that negligence penalties can occur when you:

  • Don’t keep records to prove you qualify for the credits or deductions you claim
  • Fail to include income that was reported on Form 1099, Form 1099-NEC or other forms that report business income. 
  • Rely on deduction or credits that “seem too good to be true” without checking whether they actually apply to your business. 

State Tax Deadlines

In addition to federal taxes, your business may need to pay state or local taxes, including state or local business income tax and/or sales and use tax. Each of these types of taxes can have their own deadlines. See the Resources section below for more information. 

Reasons Small Business May File Late

There are several reasons why businesses may file late:

  • You’re not organized. Your business bookkeeping is not up-to-date and as a result, you may not have the information you need to file on time. 
  • Cash flow problems. Your business hasn’t set aside enough money for taxes, and you’re afraid to file if you can’t pay.
  • You’re in the dark. You aren’t aware of tax filing deadlines, or you’re not working with a tax professional who helps make sure you stay on top of tax filing requirements. 

Strategies For Paying Taxes On Time

Implement a good financial management system for your business. Use a business checking account rather than mixing business and personal income and expenses with your personal bank account. Consider using a business credit card for business expenses. This can make it easier to keep track of what you’ve spent, and you may take advantage of rewards. 

Use business accounting software and keep your bookkeeping up to date. When your bookkeeping is up to date, you’ll be able to tell quickly and easily how much money your business is making, which can help with paying the correct amount of estimated taxes. If you don’t want to handle bookkeeping yourself, or hire an employee to do it, you can outsource it to a professional bookkeeper. Your accounting professional may offer this service. 

Take advantage of tax deductions and tax credits. These can reduce the amount of money you owe, and a lower tax liability can result in a smaller penalty if you can’t pay on time. Tax preparation software is designed to help you identify opportunities to save, and your tax professional can help as well. 

Learn and adhere to business tax deadlines. If you work with a CPA or other tax professional they can help you stay on track. You can refer to the IRS website and/or your state’s tax website for details (see the resources section below.)

Use a payroll services provider. If you have payroll, either for yourself or for part-time or full-time employees, consider using a payroll services provider that will file your employment tax forms for you, and make trust fund tax payments. (Make sure you understand what the service will and won’t do, as ultimately it’s your responsibility.) Using a PEO is another option. 

Set aside money for taxes. Your business bank account may offer sub accounts you can use to set aside money for taxes, or you may want to use a separate business savings account. Either way, you don’t want to find yourself short of funds when taxes are due. 

How To Mitigate The Consequences Of Late Tax Returns

First, even if you can’t pay your taxes, it’s usually advisable to file anyway. Failure-to-file penalties (FTF penalties) and failure-to-pay penalties (FTP penalties) are two separate penalties. By filing, you may avoid  the FTF penalty. 

Another option may be to file a tax extension which can give you an extension of time to file and avoid the FTF penalty. It doesn’t give you an extension of time to pay, though. 

Consider an installment agreement to pay what you owe the IRS and/or your state taxing authority over time. IRS or state payment plans aren’t free, and you are limited in how often you can use them, but it may be better than falling further behind and running up an even larger tax bill. 

Use a low-rate business credit card to pay your taxes. Then pay your tax bill over time. This should not be a regular practice as credit card interest rates can be high, but it can be helpful when unusual circumstances affect cash flow. You may be able to get a credit card with a 0% intro APR to avoid interest charges, provided you can pay off the balance before the intro rate APR. (There is an extra fee for paying taxes with a business credit card.) 

How To Reduce Penalties Of Late Tax Filing

If, despite your best efforts, you paid your taxes late, you may be able to get your FTF penalty reduced or waived. 

1. Apply for penalty abatement: If this is your first time filing late, your business may be eligible for first-time penalty abatement (FTA) from the IRS. Partnership returns and S corporation returns may be eligible for relief if they qualify. First Time Abate is the most common administrative waiver for both individuals and businesses.

2. Apply for reasonable cause relief. You or your business may be able to get penalties waived if you can show you “exercised ordinary care and prudence and were nevertheless unable to file your return or pay your taxes on time.” Commonly valid reasons for failing to file or pay on time include: 

  • Fires, natural disasters or civil disturbances
  • Inability to get records
  • Death, serious illness or unavoidable absence of the taxpayer or immediate family
  • System issues that delayed a timely electronic filing or payment

Note that reasonable cause doesn’t apply to certain penalties such as the estimated tax penalty. And for businesses, the reasons apply to the person with authority to submit the return, deposit, or tax. Also lack of knowledge, relying on a tax professional’s guidance, mistakes or lack of funds to pay generally don’t qualify for this abatement. 


State tax filing requirements. Here’s a complete list of state taxing authority websites where you can find more information about each state’s requirements. Keep in mind your business may have to pay taxes in states where your business is not physically located in certain cases. For example, businesses may be required to file sales and use taxes in other states, or may be required to file payroll tax returns in states where employees work. 

Federal tax filing requirements for businesses. You’ll find helpful information at IRS.gov, in the Tax Information for Businesses section. 

Taxpayer advocate service. An independent organization within the IRS, the Taxpayer Advocate is your voice at the IRS and it can help taxpayers, including businesses, with financial difficulty. If you’ve unsuccessfully tried to resolve your problem with the IRS, contact the Taxpayer Advocate Service to see if it can help. 

Accounting software. Using accounting software to track your business income and expenses on a regular basis will make it much easier to comply with tax requirements. Bookkeeping software will also often allow you to attach receipts so you have the documentation the IRS (and your state) may require. Tax software can be useful for filing your tax return if you decide to do it yourself, and will often import information from accounting software. 

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