6 Common IRS Tax Penalties for Small Businesses (And How To Avoid Them)

Picture of Dimitri Gedevanishvili

Dimitri Gedevanishvili

Marketing Manager
small business owner sitting at desk

If you’re a small business owner, chances are, you’re handling most aspects of your company yourself. One of these numerous responsibilities is managing your books.

Whether you have a few employees under your wing or you’re a sole proprietor in the gig economy, you will need to make sure your company avoids any penalties from the IRS. Here are 6 of the most common IRS tax penalties small businesses might face.

Common IRS Tax Penalty #1: Trust Fund Recovery Penalty

This penalty sounds fancier than it really is. If your business has employees, your company must withhold and pay trust fund (or, put more simply, payroll) taxes.

Trust fund (or payroll) taxes include income tax, the federal unemployment tax, and FICA (Social Security and Medicare) taxes. As a company, you must withhold the income tax and FICA tax from each employee’s paycheck and send that balance to the IRS every month.

Related: Why Small Businesses Are Vulnerable If Not Properly Tracking Mileage

It’s definitely worth remembering that any employee (or company owner!) that “willfully” fails to pay these taxes can be held liable by the IRS. The TFRP is equal to the “unpaid balance of the trust fund tax”.

Common IRS Tax Penalty #2: Tax Fraud Penalty

This is the big one – tax fraud. If the IRS can prove beyond a reasonable doubt that if you underpaid on your taxes intentionally, you will be hit with a 75% fine on the underpaid amount.

The Tax Fraud Penalty is an easy one to avoid, really. Just be as honest as possible when you file your taxes! If your small business is able to afford the expense, consider hiring an accountant or bookkeeper to make filing your taxes a breeze.

This is a big one that small business owners will need to be extremely mindful of. If you substantially underestimate your taxes or make an error due to negligence, you will be hit with a 20% penalty. 

If you’re a small business still finding its footing or a sole proprietor needing to save every penny, that can be a huge blow to your finances. It’s important, thus, to maintain accurate records for when you file your taxes.

Related: Manual Expense Reports: The Hidden Costs

Thankfully, the age of hoarding paper is long over. With powerful modern tools like TripLog, businesses can easily organize their records and save thousands every year.


Common IRS Tax Penalty #4: Failure to File Penalty

This one should be a no-brainer,: your taxes need to be filed on their due date. If you don’t, the IRS will hit you with a 5% monthly penalty, which can reach up to 25% if left unchecked.

With that said, even if you can’t pay your taxes, you should still file them on time. The penalties for simply not filing them are significantly less.

Common IRS Tax Penalty #5: Failure to Pay Penalty

If your small business filed its taxes but hasn’t paid, you will incur the Failure to Pay Penalty. This penalty is 0.5% per month. If you enter an installment agreement, you can have this penalty reduced to 0.25% per month.

If you receive a notice of levy, the penalty can increase to 1%. Consider, however, that a maximum penalty of 25% per month is possible, so pay as soon as you are able.

Common IRS Tax Penalty #6: Underpayment of Estimated Tax by Individuals Penalty

The IRS requires you to pay at least 90% of what you owe that year; otherwise, you will be hit with a penalty. These payments should be made in equal installments as they may still charge additional penalties if you pay less at first and more later on.

Related: 3 Ways SMBs Can Save Money (And 3 Ways They Lose Money)

If you pay 100% of the previous year’s tax bill in equal quarterly installments (this could be more if you earn over 150k), you can avoid penalties as well.

Managing Your Team’s Taxes & Reimbursements Doesn’t Need to be Hard.

TripLog’s powerful administrator features give managers and company owners the tools they need to maximize their profits and time savings. Know where every cent is going, and trust that you are reimbursing your team’s mileage for the right amounts, every time.

It’s never been easier to set up a mileage reimbursement plan for your company. To get TripLog’s mileage tracker app for your company, visit our pricing page or schedule a complimentary live web demo to learn more.

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