The IRS has recently increased its penalty against companies that fail to pay their employees timely. By failing to pay your employees on time, you may be forced to pay the penalty, which may lead to financial ruin.
You may not be aware of IRS penalties against late payments, but if you get caught paying late, the penalty will be around 20%. That’s almost half of your income, and you can’t avoid this penalty if you fail to pay on time.
Let’s see what you can do to avoid this penalty.
Understand IRS Late Payment Penalties
The IRS defines the penalty in section 6651 of the code, and it includes two categories – Failure to File and Failure to Pay.
Failure to File Penalty:
This is applied if you fail to file your tax returns on time. In that case, the penalty is 0.5% for each month that your tax returns are late. It applies to both employers and employees.
Failure to Pay Penalty:
In case of failure to pay your tax bills, the penalty is 0.5% of your unpaid taxes for every month that you owe the IRS. The penalty doesn’t apply to employees, but it applies to employers.
You must calculate the amount of the IRS late payment, and if you are responsible, you must pay the penalty within 30 days of your late payment. You cannot avoid this penalty by claiming to have been too busy.
Know the Difference Between Delayed and Deferred Income
If you have received income late, you may have to pay the penalty if you fail to pay within 30 days. But in case of delayed income, you can use it to reduce the penalty.
So, for example, let’s say that you get paid on the 10th of the month. And on the 20th of the month, you pay your tax bill for the previous month. The penalty is being applied to your salary on the 1st of the next month.
But if you have delayed income, you have a chance to pay the penalty before your tax bill is due. You may have to pay less than 20% of your previous month’s income.
Pay Your Employees on Time, and Avoid IRS Penalties
IRS penalties will be assessed if you fail to pay your employees on time. And if you are not careful, you may end up paying the penalty.
So, if you haven’t paid your employees on time, you must know that you are liable to pay the penalty. You can avoid this penalty by paying them on time.
If you haven’t paid your employees, you can delay their paychecks until the 10th of the following month. This will avoid late payments and penalties.
But you can’t delay the paychecks for more than four months. Otherwise, your employees will get suspicious.
Keep Your Taxes Current
Keeping your taxes current can help you avoid the penalty. If you pay your taxes on time, you can claim that you have made an advance payment. This can help you avoid a penalty. Refunds can be claimed if you have paid your taxes in full. You can claim a refund as an advance payment. You can do this by filing a refund claim three years after the tax year ends. Taxes filed late may have to pay a late payment penalty.
How to calculate late payment penalty
The IRS imposes a 10% late payment penalty on taxes. This penalty is calculated based on the late payment period and the number of days since the due date.
Here we provide a detailed description of the calculation of the late payment penalty and a table that shows how to calculate the late payment penalty.
1. Calculate the late payment period
The late payment period is calculated in two parts: the grace period and the penalty period.
Grace Period: The late payment penalty applies to the period between the payment date and the due date. The payment date is usually the 15th of each month. The payment may be made before the due date, and in this case, the penalty period does not apply.
Penalty Period: This period starts on the payment date and ends on the last day of the following year. The penalty period includes two parts:
The first penalty period (3 months) and
the second penalty period (6 months).
2. Calculate the late payment penalty
To determine the total late payment penalty, you need to multiply the late payment period by the number of days since the due date.
Let’s take a look at an example.
Payment Date: March 1st
Due Date: April 30th
Grace Period: The payment was made on March 15th, which means the penalty period does not apply. The penalty period begins on April 1st and ends on July 31st.
The late payment penalty equals 10% of the total tax that must be paid, which equals $19.75.
3. How to calculate the penalty amount?
Late payment penalty amount = Total Tax x Penalty Rate = Total Tax x 0.10 = Total Tax x 0.10 = 10% x Total Tax
4. Calculating the penalty amount
There are five categories of taxpayers: Individual, Partnership, LLC, S Corporation, and Trust.
Individual: The taxpayer’s name is required on the return, and the taxpayer signs the return.
Partnership: A partnership is a legal entity composed of two or more individuals. Each partner is treated as an individual for federal income tax purposes.
LLC: An LLC is a business organization where the liability for the company’s debts and obligations rests with a limited number of members.
S Corporation: A corporation has two advantages over an LLC:
1) it can elect to be taxed as a C corporation, which means that the corporation pays corporate taxes on its profits, and
2) it can have shareholders.
Trust: A trust is a legal entity that has no shareholders. It exists independently of the shareholders. The trustee, not the shareholders, is responsible for filing and paying taxes.
5. How to calculate the tax on the late payment penalty?
Tax on late payment penalty = (Tax on the Late Payment Penalty) + (Tax on the Underpayment)
Who is liable for the late payment penalty
The IRS requires that tax return filers make payments by January 15th. However, if you do not have enough money to pay your tax bill, you have until February 15th to come up with the required money. If you don’t make the deadline, you will owe a late payment penalty to the IRS. But what happens if you miss the deadline because you are not responsible for the late payment penalty?
The answer is that you are responsible for the penalty, even if you did not receive any warning from the IRS. This is why it is important to file your tax return early, even if you have a very small amount of money to pay.
The Internal Revenue Service (IRS) does not notify taxpayers of late payment penalties. Instead, the IRS automatically imposes a late payment penalty on individuals who fail to pay their taxes by the January 15th deadline.
The IRS issues a “30-day letter” to taxpayers who are behind on their bills. This 30-day letter informs taxpayers of the amount of money they owe and how they can make arrangements to pay off their debt. If you fail to make arrangements for the payment within 60 days, the IRS will impose a penalty on your account.
While the IRS issues these 30-day letters, the taxpayer must pay the tax debt. The taxpayer should not rely on the IRS to notify them of the penalties. Therefore, the taxpayer is personally responsible for paying off any late payment penalties that he has incurred.
When Does the IRS Impose a Late Payment Penalty?
The IRS requires that individuals pay their tax debts by January 15th. If you do not have enough money to cover your tax bill, you have until February 15th to come up with the necessary funds. You will owe the IRS a late payment penalty if you do not make the deadline. This penalty is assessed at a rate of 5% per month.
In addition to the penalty, the IRS also adds the cost of interest and possible fees to your account. As a result, you will be hit with a bill that is higher than you were expecting. For example, you may have expected to pay $10,000 for tax debt, but the total amount will be closer to $12,000.
How Can I Pay off a Late Payment Penalty?
While you are not required to pay any penalties to the IRS, you can make a payment. In fact, the IRS recommends that taxpayers wait to pay any penalties until the end of the year. After all, there is no reason to pay penalties twice.
If you pay the penalty before the end of the year, you will avoid the added interest that is included in the penalty. However, the penalty will be assessed at a rate of 0% per month. Therefore, if you pay off the penalty before December 31st, you will save the 5% rate.
However, you are only allowed to pay off the penalty if you are current on your tax bill. In other words, you cannot pay off a penalty if you are still behind on your tax bill.
Late payment penalties are not meant to punish you; instead, they discourage you from nonpayment. If you don’t pay taxes on time, you will be punished for failing to pay. So, the IRS and the Department of Treasury are trying to keep you from being penalized. When the IRS receives your taxes, they usually mail them to your last known address. If you do not return the form within ten days of mail, the IRS will charge you a 10% late payment penalty. If you’re more than 10 days late, they’ll charge you a 25% late payment penalty. The penalties go up each year so that you can have a better idea of how long you have to pay your taxes.