If you’re self-employed there’s one thing you’ll learn quite quickly and that’s that the IRS charges penalties every time you turn around. Whether it’s filing your taxes late or starting a payment plan, the IRS will nickel and dime you to death. The good news is that with a bit of work and knowledge, you can avoid these penalties.
Penalties for Filing Late
Filing late will actually cost you more than filing with a balance. If you can’t pay all your taxes by the due date, you still need to file. The penalty for filing your taxes late is 5% of the unpaid taxes for each month or part of a month until the taxes are filed. The penalty will not exceed 25%. However, if you file more than 60 days after the due date, the penalty will be the smaller of $135 or 100% of the unpaid tax. If you request an extension to file and 90% of the balance owed has been paid, you will not be charged a penalty, but the balance must be paid by the extension date.
Late Payment and Underpayment Penalties
Not paying the amount owed by the due date will result in a penalty of ½ to 1% for the months and partial months that the balance remains unpaid. The total can be as much as 25% of the unpaid balance. If both a failure to file and late payment penalty occur simultaneously, the failure to file is reduced. However, if the taxes are not filed within 60 days, the taxpayer must pay a penalty of the smaller of $135 or 100% of the unpaid taxes.
Payment Plans and Penalties
Just because you enter into an installment agreement with the IRS doesn’t mean you will be free of penalties. Interest and penalties will continue to be charged to the unpaid balance. However, those that enter into an installment agreement after filing in a timely manner may have their penalties reduced to 0.50 to 0.25%. Termination of your installment agreement will result in the penalties rising to at least 0.50%. When entering an installment agreement, pay as much as you can without the risk of having to miss a payment. This helps ensure that you can make the payment each month and that your total drops quickly. Also, make additional payments whenever possible.
If you file or pay your taxes late, the IRS will charge you for it. The longer your taxes go unfiled or unpaid, the worse the total will be when you finally address it. If you owe taxes, but can’t pay the full amount, you still need to file your taxes on time. You can then enter into an installment agreement, which will lower the penalty on the amount due; you can read more about that on the IRS website or on other tax sites. However, you still need to work hard to pay off the balance to prevent the interest and penalties from growing out of hand.