All companies and businesses in the U.S., whether large or small, must file returns and pay taxes. In some cases, small businesses struggle with cash flow challenges that give rise to IRS tax debts. The IRS is notorious for its aggressive tax collection tactics and owing a tax debt can be a source of concern, especially for small business owners.
If cash flow or other financial hardship issues are causing you to fall behind on business tax payments, you can leverage IRS tax debt relief programs to resolve your issues.
This article discusses the tax obligations for small businesses and what to do when you have a delinquent tax debt with the IRS.
When Is a Small Business Required to File Taxes?
The IRS requires small businesses to file their taxes annually. For most small businesses, the business tax deadlines are mid-April. However, S Corps, partnerships, and multi-member LLCs file mid-March.
Which tax form you use for your small business depends on how it is structured: sole prop or single member LLC (Form 1040 or 1040SR), S Corp (Form 1120S), Corp (Form 1120), partnership (From 1065).
What Are Small Business Tax Rates?
The taxes that small businesses pay are based on company revenue and whether the business is a corporation or pass-through entity. While corporations must pay a flat tax on their profits of about 21%, pass-through businesses pay taxes ranging from 10% to 37% at the tax rate for the business owner based on their taxable income.
Is Payroll Tax Included in Small Business Taxes?
Yes, small businesses are typically charged payroll taxes, provided they have employees.
Some of the most common types of small business payroll taxes include:
- Federal Insurance Contribution Act (FICA) taxes
- Additional Medicare Tax
- State Unemployment Tax Act (SUTA) taxes
- State and local payroll taxes
- Federal Unemployment Tax Act (FUTA) taxes
How Much Does the IRS Penalize Small Businesses for Not Filing and/or Paying Taxes?
The IRS may issue a Failure to File Penalty if a small business fails to file its taxes or pay taxes by the deadline. The IRS penalty a small business pays is calculated as a percentage of the taxes owed that were not paid on time.
The following are some of the common tax penalties that every small business should watch out for:
- Small Business Late Filing Penalty: 5% per month of the total business tax owed.
- Small Business Late Payment Penalty: 0.5% per month of the total business tax owed.
- Small Business Accuracy Penalty: If the IRS reviews your returns and finds deductions that cannot be verified or you did not report your total income, they may penalize you as much as 20% of the total business tax liability.
Does the IRS Offer Tax Debt Relief for Small Businesses?
The IRS typically offers tax debt relief for small businesses that cannot pay an outstanding tax debt.
The following are some of the small business tax debt relief programs:
Payment Plan
If your business cannot meet its tax obligations, consider asking the IRS for a payment plan. This will allow you to pay off your business’s tax bills in monthly installments rather than a lump sum. However, remember this route will accrue additional interest and penalties until you pay in full.
Offer in Compromise
An OIC is an “offer” settlement between the small business and the IRS to resolve business tax liabilities for less than what is owed. Requesting an OIC requires that you fill out several forms and provide detailed information regarding your business’s financial health. If the IRS determines you can pay your debt through an installment agreement or other payment program, you may not qualify for an OIC.
Currently Not Collectible Status
If your business’s financial hardship situation is severe, you can request the IRS to give you a temporary CNC status. If the IRS agrees, it will not collect back taxes until your business finances improve. However, remember, you still owe the tax and interest will keep accruing.
File Bankruptcy
If all the above options have failed, you can consider Chapter 7 bankruptcy as your last resort. Filing for bankruptcy can reduce or clear out some tax debts. However, bankruptcy is often complex, and you may need a tax attorney to guide you. Keep in mind successful tax debt discharge won’t necessarily remove previous tax liens. If you have outstanding liens, they must be paid off in full before selling your business property.
How Do I Know If I Qualify for Small Business Tax Debt Relief?
To qualify for small business tax debt relief, you must meet the following general requirements:
- No tax liens for the past 3 years.
- Have not failed to file taxes before.
- Have filed all tax returns on time or qualified for an extension.
When you apply for small business tax relief, the IRS will have you complete Form 433B. This is a collection information statement for businesses that the IRS uses to determine which tax relief your business qualifies for based on business income, assets, and expenses.
Can the IRS File a Lien or Issue a Levy If My Small Business Has Tax Debt?
If your small business doesn’t pay its tax debt by the IRS deadline or make arrangements to settle the tax debt, the IRS can file a lien or levy and sell any business property to resolve the debt.
If you have a significant tax liability with the IRS, it could put your small business at risk. Although the IRS is aggressive with collections, it provides several tax debt relief programs that can help you navigate business tax challenges.
If you need more help, you can start online by answering 6 simple questions. We never charge for ‘investigations’ or consultations. You can also call us at 866-568-4593.
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