Business income and payroll tax will be one of your biggest business expenses as an owner. This guide will show you what the most common IRS Penalties there are and how to avoid them.

The common tax penalties are:

1. Failure to file

2. Failure to pay

3. Failure to pay proper estimated tax

1. Failure to File Penalty and how to avoid it

This tax penalty is 5% of the unpaid tax for each month or part of a month that your return is late. However, it caps at 25% (5 months) of your balance. If your return is more than 60 days late, a minimum penalty applies. The minimum penalty is either $435 or 100% of the tax owed, whichever amount is less, for returns due after 1/1/2020.  Avoid this penalty to by filing an extension before the tax deadline. 

2. Failure to pay penalty and how to avoid it

This tax penalty is 0.5% of the tax you owe per month, but it also caps at 25% of the tax due. If you set up an IRS installment agreement, the IRS will reduce your failure to pay penalty to 0.25% of the tax you owe while the installment agreement is in effect. Be sure to pay your estimated tax bill even if you have an extension.

3. Failure to pay proper estimated tax and how to avoid it. 

If you owe more than $1,000 when you calculate your taxes, you could be subject to a penalty. To avoid this you should make payments throughout the year via tax withholding from your paycheck or estimated quarterly payments, or both.

The IRS calculates this penalty by figuring out how much you should have paid each quarter and multiplying the difference between what you paid and what you should have paid by the effective interest rate for that period. This means you can have a penalty for one quarter, but not the others.

To avoid or minimize estimated tax penalties, adjust your tax withholding from your paycheck or estimate your tax bill and make estimated quarterly payments. Those quarterly estimates are typically due on:

• April 15

• June 15

• September 15

• January 15

However, if one or more of those dates fall on a weekend or legal holiday, the deadline gets pushed back to the next business day.

The IRS also offers two "safe harbor" methods for determining whether you are subject to a penalty. If you meet one of these safe harbor amounts, the IRS won't charge an estimated tax penalty, even if you owe more than $1,000 at the end of the year.

The requirements are that you pay:

• 90% of the tax you owe for the current year. Estimate what you'll owe and pay at least 90% of this amount in four equal installments or through paycheck withholding.

• 100% (or 110%) of last year's tax bill. Pay 100% of the tax shown on your prior-year tax return before applying estimated payments, withholding, or refundable tax credits. If your adjusted gross income is more than $150,000 (or $75,000 if you're married and file a separate return from your spouse), the safe harbor is 110% of your prior-year tax.