While the IRS recognizes business owners experience occasional stumbling blocks, they are a stickler for deadlines. It’s important to file your LLC tax return as quickly as possible, even if you can’t pay your taxes yet. This guide walks through why that’s the best course of action for your business.
Highlights and Takeaways
- Requesting a filing extension before your filing deadline will give you an extra six months to submit your return.
- You must still pay your owed taxes by the original filing deadline to avoid penalties.
- Filing your return, even if you can’t yet pay your taxes, will likely reduce your final tax liability.
- Not filing your LLC taxes initiates a series of consequences that, if ignored, can have serious impacts on your business.
What to do if you can’t file your LLC taxes on time
Limited liability companies, or LLCs, can choose how to file their taxes.
The default method is taxing your LLC as a sole proprietorship or a partnership. This means any income your LLC earned “passes through” to your personal finances and is reported as self-employment income on your personal tax return. Using this method, the filing deadline for your LLC tax return is April 15 (or the following business day, if the 15th falls on a weekend) of every year.
You can, however, decide to be taxed as a corporation instead. If you elect corporate status for your LLC, you must file a corporate tax return by March 15 of each year.
As an LLC, you are also expected to make quarterly estimated tax payments on April 15, June 15, September 15, and January 15 of each year. If you fail to make quarterly estimated tax payments, you may be subject to additional penalties.
Further reading: The Complete Guide to LLC Taxes
Whether you’re filing by April 15 or March 15, if you know ahead of time that you won’t meet the tax deadline, you have some options to help mitigate penalties.
Request a filing extension
If you have encountered circumstances that will inevitably delay your tax filing, you can request a business tax extension from the IRS. To request an LLC tax extension, complete and submit tax form 4868. The IRS recognizes there may be a reasonable cause for late filing.
With the extension, you’ll have an additional six months to complete and file your LLC tax forms. It’s worth noting that filing an LLC tax extension gives you six months to submit the paperwork without penalty. The IRS still expects you to pay the tax due on time, however.
If you’ve been paying your quarterly tax payments throughout the year, complete the final payment by April 15 to avoid late payment fees—those begin accruing after the April 15 deadline even if you’ve received a tax filing extension.
Once you’ve submitted for a tax filing extension to the IRS, use that extension time wisely. Organize your receipts, clean up your accounting, and develop a financial system that will make it easier to manage your bookkeeping going forward to avoid being in this situation again in the future.
Further reading: Do I Need Historical Bookkeeping If I Haven’t Filed My Taxes?
If the extension deadline passes and you still have not filed your tax return, late penalties begin to accrue.
How does the IRS calculate penalties for not filing LLC taxes?
There are two parts to filing your LLC taxes.
The first is filing the actual tax return. The second is the payment of the taxes owed.
If you don’t do these by the IRS’s deadlines, there are two different penalties that you’ll be charged.
1. Penalty for failing to file your taxes
If you fail to file your tax return with the IRS by the due date, the IRS will charge you 5% of the unpaid taxes every month until you’ve submitted your income tax return. The total penalty will not exceed 25% of your unpaid taxes.
If you haven’t filed your tax return within 60 days of the deadline, the minimum penalty for failure to file is $485. If the amount of taxes you owe is less than that amount, the penalty is 100% of your total tax bill.
2. Penalty for failing to pay your taxes
If you file your federal tax return paperwork but haven’t paid your tax bill on time, the IRS will charge you 0.5% of your unpaid taxes every month until you’ve reached the maximum penalty of 25%.
If you fail to file your tax return and haven’t paid your taxes due by the due date, the maximum charged per month for both penalties is 5%. In all cases, penalties will be capped at 25% of the year’s tax bill.
The longer you wait to meet the filing requirement, the more you’ll owe in penalties. Additionally, failure to file and pay your LLC taxes is a federal crime. The IRS has a set administrative penalty schedule in place for late filing. The longer you wait to file, the greater the risk of potential civil or criminal penalties for failure to pay on time.
What to do if you’re already late on your LLC taxes
If the tax filing deadline has passed, the opportunity to request an extension from the IRS has also passed. The IRS assigns financial penalties beginning the day after your taxes are due, so if you didn’t file, the clock is ticking, and your tax bill is increasing.
Fortunately, you can stop both penalties by taking control of your tax situation and paying your back taxes as quickly as possible. In some cases, the IRS may approve a tax penalty abatement if you act in good faith with the organization.
Why should you file back taxes?
If you’ve fallen very behind on your LLC taxes, it may seem appealing to wait it out and hope it somehow goes away. Spoiler alert: it won’t go away. Just ask this entrepreneur who was $250K in debt with the IRS.
Avoid a substitute for return
If the IRS deems you unresponsive to their notices for late filing, they will file a tax return for you—called a substitute for return. A substitute for return tallies up what the IRS thinks you likely owe in taxes based on the information it can find in your bank account records, wages you’ve paid out to employees, and contractor payments you’ve made.
While this sounds like an easy option out, the tax figure they determine is likely substantially higher than the amount you actually owe. That’s because their calculation doesn’t take into account your expenses, tax deductions, or tax credits that you could be eligible for. If you fail to file a return—even years later—and just pay what the IRS calculates, you could be paying a tremendously inflated dollar amount.
Lower your tax liability
Filing your back taxes does two things.
The first is that you stop the more expensive of the two IRS penalties, the failure-to-file penalty. Once you’ve filed taxes— even if they’re late—you won’t continue to be charged the 5% penalty for failing to file.
Secondly, when you file your LLC back taxes you let the IRS know how much money you legitimately owe in taxes and subsequent fees. This amount is almost certainly less than the estimated amount calculated by the IRS.
When you file your taxes, you’ll be able to include the various tax deductions and credits you’re eligible for, which can substantially lower your tax burden. This number will be significantly lower than the tax figure calculated by the IRS as a substituted return, and the corrected tax figure will also be the basis for all penalties you’ve incurred, reducing that amount as well.
How do you start filing back taxes?
If your taxes have gotten away from you, it can be daunting to try and wrangle them back into control. Before you can do any tax filing, you must do your bookkeeping. Catching up on your entries of receipts, payments, expenses and other business-related financials gives you a clear picture of your actual tax obligation.
Further reading: Why Bookkeeping Is An Important First Step in Settling Your Tax Debt
Once your books are updated with the correct financial information for previous years, filing a tax return is straightforward. You’ll have all the correct numbers readily available.
Sorting through all the financial documents and numbers amassed over a long period of time can be daunting. Working with an expert can make this process faster and more comfortable for many business owners.
Specialized experts like Bench (that’s us) can handle the entire process on your behalf to get you up to date and ready to file all missing back taxes. Bench can even help you with the tax filing, freeing up your time to continue looking forward in your business, while we handle looking back. Learn more.
What happens if you don’t file business taxes at all?
If you don’t file your taxes at all, you can expect the IRS to alert you of the oversight in increasingly direct ways. All communication from the IRS will happen through traditional mail. Any threatening calls or emails are tax scams, so be wary.
You’ll get reminder letters.
The first communication from the IRS is a simple reminder letter about your tax liability. This letter outlines the penalties that will apply and offer you contact information to notify the IRS about your intent to file and pay. You can expect subsequent letters to arrive until the matter is resolved.
You’ll start incurring penalties.
Penalties start immediately after you miss the filing deadline. Subsequent communication from the IRS will include mention of these accruing penalties.
Your assets may be levied.
If you fail to file for an extended period, the IRS may decide to get their money where they can and levy your assets. The IRS will file a tax lien, or a claim of ownership, on business property or other business bank accounts and extract the value of your unpaid taxes through these alternate means.
The IRS will file for you.
If it’s been two or three years since you filed your LLC taxes, the IRS will file a substitute return for you. This return will not include any deductions, credits, write-offs, or exemptions and will likely result in a larger tax and penalty bill.
There might be legal consequences.
The IRS has several crimes that are tied to failure to file and pay taxes. If you are willfully evading taxes, you may be faced with federal charges that can be punished with up to five years in prison and $250,000 in fines.
LLC tax resolution with Bench Accounting
Filing your back taxes requires updating your books. That’s where Bench can help. We are America’s largest professional bookkeeping service for small businesses. Our specialized team of historical bookkeepers clean up your books fast, find all applicable tax deductions, and determine your correct taxable income. We can even file your taxes for you.
Talk to an expert for free to find out if we can help you get in good standing with the IRS.
The bottom line
Life happens and deadlines race by, even when we have the best of intentions. If you are close to or have missed the LLC tax deadline, it’s worth being proactive.
Do the work to file your back taxes. You’ll likely reduce the amount you owe in penalties. You’ll clean up your bookkeeping. And you’ll be right on track for future tax payments and filings.
