It’s that time of year again…tax season. For many small business owners, taxes top the list of business-related concerns. In fact, the NFIB’s Small Business Economic Trends survey, released earlier this year, revealed that 20 percent of companies cite taxes as their biggest problem.
With April 15 fast approaching, more and more small business owners are tossing around the idea of filing for a much-needed tax extension. While filing for an extension might seem like the way to go during the hustle and bustle of tax season, there are a few things small business owners should consider before deciding to file for a six-month extension:
Related Article: Save Your Sanity: The Best Tax Apps to Download This Season
Extra time to file doesn’t mean extra time to pay.
An extension will change the tax filing deadline from April 15 to October 15, but you still have to pay the tax you owe by the April deadline.
If you don’t, you’ll have to pay interest on the unpaid amount plus an extra 0.5 percent in penalties for every month you’re late. However, the penalties for not filing on time are much higher than the penalties for not paying on time; five percent for each month or part of a month you’re late, up to 25 percent.
That being the case, if you need extra time to finish up your tax return, don’t hesitate to file for an extension. In an effort to avoid needing to file an extension, implement a payroll system you can rely on to automate tax filings and maintain compliance in accordance with ever-changing state and federal regulations.
You can’t be sure exactly how much you owe without first completing your tax return.
And, while filing for an extension gives you an additional six months to finish your tax return, you still have to pay the amount owed by April 15; meaning you’ll have to do some heavy estimating.
If you miscalculate the amount of tax owed, you’ll have to pay the necessary penalties and fees. If you paid less than 90 percent of the tax you owed, you’ll end up owing a penalty of 0.5 percent of the unpaid amount every month until you pay the balance.
To avoid unnecessary penalties, the IRS has a Form 1040-ES that includes a worksheet you can use to calculate your estimated tax payments. On the other hand, using a full-service payroll system ensures the accurate calculation of taxes owed.
Related Article: Accounting Mistakes That Put Your Small Business at Risk
It will make acquiring a new loan difficult.
If you think you might need a loan sometime in the near future, you might want to think twice before filing for an extension. For starters, a recently filed tax return is usually a required financial document when seeking a loan or other forms of credit from a bank.
Banks use recent tax returns to gauge compliance. While filing for a tax extension doesn’t necessarily raise any red flags, not having your tax return in hand does little for your cause.
Your potential refund will take longer.
As a small business or startup, you might be due a tax refund from the IRS; once you file your taxes, that is. Filing for a tax extension also means having to wait awhile longer to claim your tax refund. If you wait to file your taxes until October, you won’t see that money until the fall.