Tax underpayment penalties can apply to both individual and corporate taxpayers. Underpayment penalties can have detrimental effects on merchants.
What are Underpayment Penalties for Merchants
Underpayment penalties are interest and fees that incur from late or incorrect tax payments. The IRS also refers to this as Underpayment of Estimated Tax by Corporations Penalty.
Most businesses can expect to pay at least $500 in taxes annually. Quarterly payments can keep corporations from underpaying or delaying payments.
Businesses can know if they have underpayment penalties if they receive a notice from the IRS stating so.
How are Underpayment Penalties
The IRS takes a few factors into consideration when calculating an underpayment penalty. The amount of the underpayment, time period of past due payment, and interest rate are all used to calculate underpayment penalties merchants owe. Penalties can be anywhere from .5% to 25% of the owed amount.
Underpayment interest rates depend on how and when taxes were filed. Additionally, merchants are able to dispute interest rates they deem unfair.
How Do I Avoid Underpayment Penalties
Business taxes are more complex than personal taxes. It can be easy to miss a few details such as the wrong amount and date.
Businesses and corporations use Form 1120-W to calculate estimated tax. They must pay 100% of the previous year’s tax or 90% current year’s tax to avoid any underpayment penalties.
There are instances where merchants may not be able to pay the full amount of their taxes in time. In these cases, the IRS offers payment plans to aid businesses in paying their taxes as well as avoiding underpayment penalties by doing so.
Additionally, keep track of quarterly tax due dates, which are: April 15, June 15, September 15, January 15.
Are There Exceptions for Underpayment Penalties?
Underpayment penalty exceptions include instances such as disability, crisis, or owing anything less than $1,000. It is less likely for a merchant to be exempt from underpayment penalties than for individuals. Nevertheless, businesses should check to see if they can be exempt from any underpayment penalties they owe. In the meantime they may be able to get a reduced penalty in the right circumstances.
Are There Other Penalties Besides the Underpayment Penalty?
Businesses need to look out for other penalties when it comes to taxes. There are penalties for:
- Withholding payroll taxes
- Information returns
- Late return
- Late tax payments
- Inaccurate tax calculation
Underpayment and other penalties are unpleasant, and failure to comply can lead to loss of business or civil action.