Rooting Out Tax Troubles and Helping Salon Owners Avoid IRS Penalties and Interest

 

As a business owner, proactive tax management is crucial. This includes staying on top of your tax obligations by filing and making payments in a timely fashion. Many business owners are unaware of the hefty penalties and interest that can accrue upon missed or delayed tax payments. 

Penalties aside, the current IRS interest rate stands at 8% (subject to adjustment quarterly) for all taxpayers, including individuals and businesses, for both underpayments and overpayments. However, there's an exception for large corporate underpayments, which are subject to a 10% rate (subject to adjustment quarterly). This article will shed light on the most common IRS penalties seen in the industry, many of which are often overlooked, and how you can avoid them. 

These interest rates apply not just to the tax owed but also to any penalties assessed. For example, if you're late filing your salon's tax return or paying your taxes, you'll face penalties, and interest will accrue on both the unpaid tax and the penalties from the due date until the date of payment. This compounding effect can quickly increase your tax debt, making it essential to address any tax issues promptly. 

Remember, even if you can't pay in full, filing on time and setting up a payment plan can help minimize penalties and interest. Stay informed about these rates and their potential impact on your salon's finances to avoid unnecessary costs and maintain good standing with the IRS.

Underpayment of Estimated Tax Penalty

For many salon owners and self-employed stylists, the underpayment of estimated tax penalty, which can be up to 25% of the underpaid amount, can come as an unwelcome surprise. This penalty applies when you haven't paid enough taxes throughout the year, either through withholding or estimated tax payments.

If you are self-employed or receive income that isn't subject to withholding, you will likely need to make estimated tax payments. This includes (but is not limited to) :

• Independent contractors
• Sole proprietors
• Partners

Generally, you should make estimated tax payments if you expect to owe $1,000 or more in taxes when you file your return. The IRS requires estimated tax payments once every quarter. The due dates are as follows:

• April 15 (for income received between January 1 to March 31)
• June 15 (for income received between April 1 to May 31)
• September 15 (for income received June 1 to August 31)
• January 15 of the following year (for income received September 1 to December 31)

Note: If any of these dates fall on a weekend or holiday, the due date is moved to the next business day.

Remember, if you're not receiving a W-2 and are earning income, you likely have an estimated tax payment requirement. This includes tips, which are considered taxable income.

Recent IRS actions have underscored the importance of staying compliant with tax obligations. In the past year alone, the IRS assessed a staggering $7 billion in penalties for failure to make estimated tax deposits. This aggressive stance highlights the agency's focus on enforcing compliance and the potential financial risks for business owners who need to catch up on their tax responsibilities.

The sheer magnitude of these assessments serves as a wake-up call for business owners and self-employed individuals. It's clear that the IRS is taking a hard line on tax compliance, and the consequences of falling behind can be severe. This recent development emphasizes the need for vigilance and proactive tax management strategies.

Failure to Pay Penalties

Even if you file on time but can't pay the total amount owed, you're not off the hook. Further, many taxpayers do not realize that an extension to file is not an extension to pay, meaning that if you file an extension and timely file six months later, your payment is considered six months late. 

The failure to pay penalty accrues at a rate of 0.25% - 1% of the unpaid taxes for each month the tax remains unpaid; it is capped at 25% of the total unpaid tax. The monthly penalty amount can be calculated based on the following circumstances: 

• Taxpayer is in an active installment agreement (0.25% penalty per month), 
• Taxpayer has not received a Notice of Intent to Levy (0.5% penalty per month)
• Taxpayer has received a Notice of Intent to Levy (1% penalty per month)

Failure to File Penalties

Missing the deadline to file your tax return can be costly. The IRS imposes a failure-to-file penalty that accrues at a rate of 5% of the unpaid taxes for each month that the return is late. This penalty can accumulate up to 25% of the unpaid tax, meaning it only takes five months to maximize the penalty.

Failure to Deposit (Payroll) Penalties (Employers Only)

Payroll tax deposits are a critical responsibility for salon and spa owners with employees. Depending on the return the taxes are reported on, filing history, and additional factors, there are different deposit due dates. The IRS takes late deposits seriously, with penalties that increase based on how late the deposit is:

• 1-5 days late: 2% of late payroll tax deposits
• 5-16 days late: 10%
• 16+ days: 10% if you pay within 10 days of the IRS's first notice, OR
• 16+ days: 15% if you pay ten or more days after the date of the IRS's first notice

Penalty Abatement Options

 

Penalty Abatement Options

While prevention is ideal, the IRS offers some relief options for those with assessed penalties:

1. First-Time Penalty Abatement (“FTA”)
2. Reasonable Cause Penalty Abatement (“RCPA”)

The IRS offers FTA on a one-time basis. The taxpayers need not provide reasonable cause or explanation for why they did not pay or file timely. This can be a valuable lifeline for taxpayers who have generally been compliant but have run into issues for the first time or had a one-time issue. To qualify for FTA:

1. You must have no penalties for the three tax years prior to the year you received a penalty.
2. You must have filed all currently required returns or have filed an extension.
3. You must have paid, or arranged to pay, any tax due.

RCPA requires more documentation and explanation, with a formal written submission to the IRS. Still, it can be a valuable route for those facing penalties due to circumstances beyond their control. The IRS considers several factors when evaluating reasonable cause, such as:

1. Natural disasters or other uncontrollable circumstances
2. Death, serious illness, or unavoidable absence of the taxpayer or immediate family member
3. Inability to obtain necessary records due to uncontrollable circumstances
4. Tax preparer mistakes or misconceptions despite exercising ordinary business care and prudence

To request RCPA, you'll need to provide a detailed explanation of the circumstances that led to the tax issue and supporting documentation. This might include medical records, insurance claims, or other evidence that supports your case. It's worth noting that "I didn't know" or "I forgot" are generally never considered valid reasons for RCPA. 

Conclusion

Navigating the complex world of tax penalties and abatement can be challenging, especially while trying to run a successful business. If you're facing IRS penalties or want to ensure you're taking the proper steps to avoid them, consulting with a tax professional is wise.

In light of the recent IRS crackdown on estimated tax deposit penalties, staying vigilant about your tax obligations is more important than ever. Take action now to ensure you meet your tax responsibilities and protect your business from costly penalties and interest.

Remember, your focus should be running a successful beauty business, not worrying about tax penalties. By implementing sound tax management practices and seeking professional tax guidance, you can minimize tax-related stress and focus on what you do best - making your clients look and feel fantastic.

For assistance with penalty abatement services and other tax-related concerns, contact Azarvand Tax Law via email at Info@AzarvandTaxLaw.com, via phone at (410) 698-4005, or visit our website at AzarvandTaxLaw.com. Our experienced tax professionals can help you understand your options, prepare a strong case for penalty abatement, and develop strategies to keep your taxes on track.