It’s tax time! As a rule of thumb, you should always file your taxes on time. But even rules of thumb have exceptions.
There are a few reasons small business owners may find themselves tempted to hold off on filing taxes. But, considering the cost of late filing fees, is doing so worth it?
First, it’s a good idea to look at the main reasons you may wish to file late. Then, we can consider how much late filing costs you and your business—and whether (depending on your circumstances) missing the tax deadline is a smart idea, or an act of reckless bravado.
Reasons you may choose to miss the tax deadline
So, there are four decent reasons you may wish to hold off on filing in 2021; let’s get into it.
You’re still waiting on key documents
If, outside of running your own business, you work for someone else, you’ll need a Form W-2 from them before you can file your taxes.
And if you’re a contractor, you’ll need a Form 1099 from each client who paid you more than $600 over the course of the tax year.
If you haven’t received either of those, you don’t have the information you need to file your taxes.
If that’s the case, request a tax extension as soon as possible, then contact your employer or clients requesting they send you the necessary forms. That way, you aren’t relying on them to have their act together in order for you to meet the tax deadline.
You aren’t ready to close the books
Before you can file your taxes, you need a complete set of accurate books, with financial statements for the entire year. Otherwise, you can’t accurately report your income and expenses—or, at least, you can’t be sure the numbers you’re reporting are accurate.
Maybe you haven’t closed your books for the year because 2020 was overwhelming and you’re still playing catch-up. Or maybe your accountant or bookkeeper is flooded with work, and can’t keep up.
In either case, file for an extension as soon as possible. Then, hire a professional to get your bookkeeping caught up quickly.
You’re out of town, or too busy
Lockdown orders and travel restrictions due to COVID-19 may have you sheltering in place and unable to access business records.
For instance, if all your invoices and receipts are on paper, stored in a filing cabinet in your office two states away, you may not be able to access them.
If that’s the case, there’s not much you can do—there’s no way to accurately file your taxes without accessing your records. It’s better to file for an extension and wait than to guess at your income or expenses for the year.
You may also be too busy to file your taxes—maybe you’re behind on your bookkeeping, or you’ve misplaced documents. Don’t feel bad: many, many business owners are struggling with the fallout from COVID-19, and having difficulty getting organized.
Rather than wallowing in guilt and letting the deadline creep up on you, file for an extension as soon as possible. Then, get professional support organizing your financials from an accountant or bookkeeper.
You have the money, but need more time
Calculating how much you owe—or how much you might expect as a refund—if one of the benefits that comes with filing your taxes.
If you’ve been withholding 25 – 30 percent of your income for taxes, you likely have enough to cover your tax bill. In that case, you can afford to wait to file your taxes; you’re not dependent on filing to figure out how much money to put aside, or plan any end of year tax moves.
Even if you file late, the IRS requires you to pay all of your taxes on time. So, if you have the money, you should go ahead and file for an extension—then pay your taxes, based on how much you saved from your revenue.
Plus, penalties for late filing are based on outstanding taxes owed. Paying up front is a good way to avoid being charged penalties; in that case, late filing becomes more of an accounting and bookkeeping inconvenience than a monetary cost to your business.
This mainly applies if you’re filing as a sole proprietor. If you are filing for a partnership or a corporation, you have members or shareholders, respectively, whose finances will be affected by late filing. In that case, no matter what you’ve set aside from your revenue, it’s best to file as soon as possible.
How to file for an extension (and what happens if you don’t)
Filing for an extension gives you an extra six months to file your taxes. If you don’t think you’ll be ready to file taxes by the time the deadline arrives, you should file for an extension right away.
Bench has a thorough guide on the fastest, easiest ways to file for a tax extension.
If you don’t file for an extension, and you miss the tax deadline, the IRS will charge you a failure-to-file penalty on any unpaid taxes.
You’ll be charged five percent of outstanding tax payments for every month past the filing deadline, up to a maximum of 25 percent.
If you’re more than 60 days late filing, you’ll also be charged a minimum fine—the lesser of $435, or 100 percent of tax owed.
There are a few valid reasons to file your taxes late; in those cases, later is better than never. By filing for an extension, and paying your taxes as soon as possible, you can avoid IRS fines.
But the sooner you get your books closed and your taxes filed, the sooner you’ll be ready to start a new year of bookkeeping—and a new year working to grow your business.