Avoiding Business Tax Fines and Penalties
One of the big differences between business income taxes and personal income taxes is the way they are paid. Individuals working as employees have income taxes and FICA taxes (for Social Security/Medicare) withheld from their pay. Business owners do not receive a paycheck, so they must estimate and pay taxes for both income tax and self-employment tax (Social Security/Medicare) on a quarterly basis, in order to avoid fines and penalties.
The IRS says:
Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. If you do not pay enough by the due date of each payment period,...you may be charged a penalty even if you are due a refund when you file your tax return.
Estimating Business Taxes
The best way to avoid underpayment fines and penalties is to pay estimated taxes on your net business income, four times each year. Estimated tax payment dates are April 15, July 15, October 15, and the following January 15. Read more about how to calculate and pay estimated business taxes, both income taxes and self-employment taxes.
How to Calculate Underpayment and Penalties IRS Form 2210 includes a flow chart which leads you through the calculations to determine if you underpaid estimated taxes and the amount you underpaid.
Use the flow chart on IRS Form 2210 to see if you have underpaid your estimated taxes, and the amount you have underpaid. Send in the payment as soon as you discover the error. The calculation for penalties is even more complicated, so might want to let the IRS calculate the penalties and send you the bill.
Send in the payment as soon as you discover the error. The calculation for penalties is even more complicated. The IRS says you can let them determine the underpayment and penalties, in most situations.
William Perez, Guide to Tax Planning, has information about how income tax penalties are determined and applied, and what penalty relief is available for the current tax year.