5 Highest Penalties for Small Businesses

Small business owners, especially new ones, can be surprised by the common tax penalties of owning their own company. The many complexities of reporting taxes for small businesses can be a minefield for those who don’t know what to look for.

Below are the top five issues– and penalties – that business owners incur.

1) Late Payment or Failure to File. This is one of the steepest and most common penalties.
Late taxes are penalized at a rate of 5% to 25% a month. Luckily, this is also one of the
most avoidable penalties.

2) Late Payment or Failure to Pay Penalty. The only thing worse than #1 above is to be late
or fail to pay the penalty for committing #1. This penalty is about 0.5% a month on the
outstanding balance on top of any penalties for the late of failure to file initially.


3) Underpayment of Estimated Taxes. Many small businesses incorrectly calculate their tax
liability. The IRS generally does not charge a penalty unless an owner fails to pay 90% of
his or her current tax bill. Payments should be made in equal installments.

4) Tax Fraud Penalty. The IRS inflicts one of the harshest penalties for under-reported
income. Once proven, the IRS may charge a 75% tax fraud penalty on the underpayment

5) Trust Fund Recovery Penalty. If a business has employees, the employer must withhold a
portion of taxes and pay trust fund taxes which include income tax, social security,

Medicare, and federal unemployment tax.

While the IRS may hold an employee liable, it is ultimately the business owner who is on the hook.

These fines often come as a shock to business owners and become unforeseen expenses in the running of their small business.

They can eat into the funds of a company, derail projections, and reduce the return on investment (ROI). Avoiding these common tax pitfalls can bolster and propel the success of any small business, especially in its first year.

Feel free to email us or message us if you have any other tax preparation tips or ideas!

Written By: Nushin Zarrabi 

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