How to Handle Tax Liabilities for Your Business

Every year many taxpayers (individuals and businesses) including contractors prepare for the tax season by having financial statements prepared and filing tax returns to comply with federal, state, and local tax laws. Of equal importance, a business must be prepared to pay any tax liabilities incurred as a result of their filing.

Perhaps ironically, a contractor who experiences a significant financial profit in a given year is likely to expect a tax liability. The ability to pay this tax liability can become a serious burden, especially if the profit has been used for operational purchases or has already been paid out to the owners.

There are several reasons why contractors might not regularly file tax returns. Sometimes it’s down to a lack of knowledge or simply misunderstanding their tax compliance obligations, and/or not having their financial statements in order, but in our experience we’ve met many contractors who say it’s a simple fear of how much tax they might owe. That is, in fact, the biggest reason that contractors often do not file their tax returns on time. We have even dealt with cases in which contractors have not filed taxes for more than five years!

This decision not to file taxes puts contractors in a situation that causes them to incur additional expenses related to taxes, specifically with penalties and fines, such as a Failure to File (FTF) penalty, in addition to a Failure to Pay (FTP) penalty, including interest on the outstanding tax liabilities.

If this sounds familiar, don’t be alarmed. There are several viable options available to help you address your outstanding tax obligations. If you’ve received a “Notice of Tax Due and Demand for Payment”, it is imperative to move quickly to avoid any additional consequences, such as tax liens and levies.

There are several ways to address outstanding tax obligations. Here are the four most common. 

Paying Off the Entire Debt

This is obviously the best solution, provided that your business can afford to pay off the debt without stifling cash flow. Not paying the tax debt in its entirety results in much greater costs, including the Failure to Pay penalty plus interest on the outstanding tax liability. The Failure to Pay penalty is 0.5% per month, up to 25% of the outstanding tax liability. In addition, interest is charged on the unpaid tax balance. The interest rate is determined quarterly and compounded daily.