5 Tax Penalties Small Businesses Should Be Aware Of

Tax Penalties for Small Businesses

Business Tax Penalty

While tax season isn’t typically described as “fun” by most people, it is a requirement of doing business. Unfortunately, staying on top of the ins and outs of ever-evolving tax laws, corporate income-tax rates, and appropriate business deductions isn’t always easy. In fact, it can be a nerve-racking chore for small businesses. Having the help of a professional accountant will help you through this process smoothly. But it’s also very important to get right.

That’s because even honest mistakes can result in tax penalties from the Internal Revenue Service (IRS) that take money directly from your company’s bottom line. Luckily, tax penalties are avoidable.

But how do you avoid tax penalties and capturing the attention of your state auditor? First, make sure you have the right professionals preparing your tax returns, that’s one business requirement you don’t have to do.

You want to hire credentialed professionals accountant with a deep understanding of tax laws, as well as experience with taxes in your state because each state has its own regulations and complexities and you want to stay compliant. Here are five penalties small businesses taxes should know about this tax season.

1. Late-Filing Penalty

Tax-filing deadlines are strict and important to meet but can be confusing to keep track of. The deadline for filing personal and corporate taxes is April 15. However, limited liability companies (LLCs), S-corporations, and partnerships must file by March 15. Not understanding the right tax-filing deadline for your legal entity means sometimes missed tax filings are unintentional.

Tax preparation experts know the tax deadlines and can help your small business avoid unintended late filings. The bottom line is that if you miss a tax-filing deadline, you’re going to have to pay for your mistake with penalties and interest. Your failure-to-pay penalty is based on the amount your company owes and the interest rates vary.

Set calendar reminders of important tax deadlines and consider even filing early – it’s also a great way to discover if an identity theft scammer has attempted to file taxes in your company’s name.

2. Tax-Evasion Penalty

This is one of the IRS’s harshest types of penalties because it does not involve honest mistakes, oversights, or errors. It’s the willful avoidance of paying taxes via illegal methods, which could be a small business intentionally doing something (like paying in cash) or omitting to do something (like intentionally under-reporting all their income).

Business owners who commit tax fraud by what the IRS calls “voluntary, conscious, and intentional” conduct could see stiff penalties that may even include jail time. Accordingly, these businesses will also be charged with hefty penalties.

Watch out for unreported or under-reported income, and always be as accurate and honest with your tax responsibilities as possible. Knowingly lying on your company’s income-tax return in an attempt to get more money simply invites trouble, and your small business could even face a criminal investigation.

3. Inflated-Deduction Penalties

Taxing advantage of every allowed tax deduction can really help even the smallest of businesses maximize its tax return. And you certainly don’t want to leave money on the table by not deducting all the valid, business-oriented deductions to which you’re entitled.

How your small business deduct charitable contributions, for example, depends entirely on your business type. Corporations (but not “S ” corporations) are permitted to make charitable contributions on their income tax return, however, all other businesses must pay taxes as pass-through entities.

The Tax Cuts and Jobs Act allows small business owners to “pass-through” a percent of income on the owner’s personal tax return instead of at the business level. If you want to give to a qualified-by-the-IRS charity and get a tax deduction, your company must itemize the charitable deductions in the hope of getting above the standard deduction amount.

Poor record-keeping or expense tracking can be culprits to mistake making. As a small business owner, remember: you’ll need detailed records of your business expenses, including receipts. Among the most common mistakes is not acquiring and retaining the acknowledgment letter for your charitable donation. A canceled check is not enough documentation.

Overstating your tax company’s deductions of all types could result in an IRS penalty on the disallowed amount. And you might even face an IRS criminal investigation. Don’t stretch the truth and let tax-deduction mistakes cost your company money.

4. Penalty for Late or Non-Filing of Form W-2s

Regardless of size, every small business must file a Form W-2, Wage and Tax Statement for each employee. Specific state filing deadline dates vary and filing deadlines can further vary for electronic versus paper submission types.

In addition, businesses must provide a Form W-2 to each worker by the last day of January. While it is possible to officially request one 15-day extension, the IRS doesn’t automatically grant extension approval so don’t count on your small business getting a later deadline.

It’s certainly a lot to keep track of. If you make a mistake or file late, the IRS might impose penalties, an amount which increases with time. You can avoid penalties by filing ITR by the due date, accurately, and with employees’ correct legal names and Social Security or Tax Identification Numbers.

5. Penalty for Missing Form 1099

Small businesses must submit form 1099s for any payments to non-employees like freelancers, consultants, or independent contractors to which $600 or more was paid during the year. Employers with 250 or more employees must e-file, while those with fewer employees can elect to use paper if preferred. You also must use a Form 1099 to record payments of more than $600 for prizes and awards, commissions to non-employee salespeople, and more.

It’s important for small businesses to comply with 1099 reporting requirements to ensure payments to others are properly reported as income. The amount of the tax penalty for noncompliance varies, depending on how late you were with each submission.


Proactively work to make sure you aren’t missing any tax deadline and hire credentialed professionals so your small business can comply with tax provisions and deadlines. Always confirm that your tax professional has an active IRS Preparer Tax Identification Number (PTIN) via the IRS Directory of Federal Income Tax Preparers – it’s online and searchable.

Don’t get into trouble with the IRS. Take time to focus on what really matters – growing your business and let the tax-preparation professionals focus on the filing deadlines and the nuances of complicated provisions.

About Aditi Singh 356 Articles
Aditi Singh is an independent content creator and money finance advisor for 5 years. She is recently added with Investment Pedia. Internet users are always welcome to put comments on her contributions.

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