common-tax-penalties-for-entrepreneurs-payal-mehta

It’s Springtime, which means, tax season is upon us.

For some, this means large refunds checks. For some business owners, however, without proper planning or understanding of common tax penalties, it can become very overwhelming.

While entrepreneurs enjoy the freedom and flexibility to make your own hours are great, it also comes with a significant amount of additional responsibility. Many leave their corporate jobs with benefits to pursue something on their own and can quickly forget the added responsibilities that come with the decision.

Business owners take on a great deal more in terms of day-to-day financial obligations, like accounting, bookkeeping, and keeping up with taxes.

With the tax filing deadline approaching soon for calendar year filers, there are a few common penalties entrepreneurs should be aware of to avoid paying the IRS more. These can be avoided easily:

Failure to file.

Failure to file your taxes by the filing deadline will result in a penalty. If you know you will not have all the necessary documentation together in time to file, you can file an extension with the IRS. The extension is only for filing and does not mean you can avoid paying your taxes.

It’s important to understand your entity type as some have different filing deadlines. Partnership and S corporations must be filed by March 15th. If you are a Sole Proprietor or C Corporation, you can file by April 15th. The amount of penalty depends on the type of business entity and/or business income. Several State and federal tax requirements are different.

Failure to pay taxes.

If you do not pay your taxes by the tax deadline, you usually will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. Filing an extension, again, does not increase the time to pay taxes.

Underpaying your estimated quarterly taxes.

As a small business owner, it is your responsibility to pay taxes directly to the IRS. If you do not pay at least 90% of your estimated taxes, you may receive a penalty. If for some reason you are unable to pay an installment, paying more later may still leave you with a penalty. The IRS prefers equal installments throughout the year.

Failure to file Form 1099-MISC.

Your business must issue Form 1099-MISC to each person whom you paid $600 or more during the year for rent, services, prizes or awards or other income payments.

Sales tax obligations.

Most of the taxpayers focus on income tax and are not aware of sales tax filing requirements. If you are selling products, make sure you are registered with the respective state sales tax authority. With the recent ruling by the Supreme court on Wayfair case, you do not actually need a physical location to create nexus. This mostly affects online retailers. If you are selling products online, check with the states to make sure to comply with the state sales tax requirements.

How to avoid penalties:

Getting to know your business income and sales tax requirements and important filing deadlines are the first steps in making sure you file on time.

Making sure your bookkeeping is done throughout the year so that you do not struggle to create your financial statements at the end of the year. I would recommend preparing your financial statement every quarter. It also helps in making your estimated quarterly tax payments.

With the complexities involved in federal income and state tax requirements, hiring a competent tax professional may benefit you. Your tax professional can help you with the tax filing requirements and guide you to make sure you do not miss important filing deadlines.

To avoid 1099 MISC related penalties, getting a Form W-9 from the vendor or the contractor is very important. You should also know that one copy of the 1099 MISC goes to IRS, two to the vendor and one to the state. You also keep one copy for your record keeping purposes.

Tax season does not have to be scary. Work with a professional and take the necessary steps during the year so that come tax time, you can be over with it and onto creating great work.


Payal Mehta is a licensed CPA in the state of California and an Enrolled Agent. She is the Owner and Founder of North County CPA. She has more than ten years of accounting experience in various roles at different companies. Payal joyfully helps entrepreneurs with their tax and accounting needs and loves playing even a small part in their success. She provides accounting, bookkeeping, income, and sales tax services. She also provides guidance on choosing business structures, tax planning, tax preparation, and part-time Controller needs.

Payal has open office hours as a Hera Hub Tax and Accounting GURU at Hera Hub Sorrento Valley. You can see her every other Tuesday from 10:30am-12:30pm.