What If I'm a Sole Proprietor and Didn’t File My Business Taxes?

So the tax deadline has come and gone and you did not file your taxes? It could be your just forgot or ran out of time, but most people who do not file their taxes do so because they did not have the money to pay their tax bill. If you are a sole proprietor and didn't file your business taxes, all the same penalties and fees will apply just as they would from not filing your personal tax return.

A sole proprietor is a business that is not incorporated and is filed with the owner’s personal tax return. The main difference between being a W-2 employee and a sole proprietor is that taxes are not taken out and must be paid in estimated tax payments. Typically, W-2 employees will not actually owe taxes at the end of the year but most sole proprietors will. Having unpaid taxes can lead to significant penalties and interest if taxes have not been filed.

Penalties for unfiled or unpaid taxes

The first thing you need to be aware of if you did not file your tax return is the penalty fees that you will now owe:

• IRS failure to pay fee. The failure to pay fee is calculated monthly and adds 0.5% onto your total tax bill for each month that you continue to not pay. This is the typical penalty that is charged if taxes are filed but not paid. As you can see, it is significantly lower than the penalty charged for not filing and not paying (failure to file fee mentioned below). The maximum that this penalty can be is 25% of initial tax amount owed.
• IRS interest fee. The total of your unpaid balance will also carry an interest penalty fee of 4% annually (the IRS updates this amount quarterly). Each quarter you fail to pay your bill, your total amount due is recalculated with the added interest.
• IRS failure to file fee. The failure to file fee is the most stringent, coming in at 5% for each month that you fail to file your return and don't pay the taxes owed. The longer you wait to file, the steeper the fee gets. The fee can be up to 25% of the total amount of your tax bill.

There are additional penalties and fees that you should also be aware of:

• If you have not filed your return and are due a refund, you could lose part or all of the money the IRS owes you. Typically, there will not be any penalties in this situation, but after three years the filer forfeits all rights to a tax refund. Why give the IRS an interest-free loan if you are owed money?
• Additionally, if you fail to file your taxes, the IRS can impose an additional $25,000 and up to one year in prison. Although this does not happen often, they do have the right to do so under certain circumstances.

More articles from AllBusiness.com:

• 6 Common IRS Tax Penalties on Small Business Owners
• Should You Incorporate as a Sole Proprietor or LLC?
• Vacation and Sick Leave Policies for Your Small Business
• How to Protect Yourself From the ‘Dirty Dozen’ Tax Scams
• How an Accountant Can Save Your Business Money at Tax Time—And All Year Long

What to do if you have not filed your return

If you have not filed your return and are reading this article, you are most likely looking for guidance on what you should do. The answer in simple terms is to file your return. Do not wait any longer—each day that goes by adds to your bill and most likely is also increasing your stress level. Here is rundown of the exact steps you need to take.

1. Gather your tax documents for the year or years you have failed to file your tax return(s).
2. Either do it yourself or hire a tax professional to fill out required tax preparation forms for your return.
3. Once steps one and two are completed, you will now need to file your return and pay your bill.

What if you can't pay your bill?

If you can’t pay your bill, don’t panic—you do have options. First, be sure to file your tax return as soon as possible to prevent the failure to file penalty from adding up to a large amount. While it is, of course, best to pay your bill in full when at all possible, a partial payment is better than no payment. If you cannot pay your bill in full, your next best option is to set up a tax installment agreement through the IRS. The IRS offers a few different options for installment plans depending upon the taxpayers unique financial and tax situation. Most tax filers are able to do this directly on the IRS website or you can call the IRS for assistance.

If you are truly strapped for the money and really do have no means of paying your bill due to special circumstances, you can file for an offer in compromise or receive a partial payment installment agreement. Keep in mind that offers in compromise are rarely granted. If you do qualify, however, you will reduce, possibly delay, or wipe out your tax liability.

It is important to keep in mind that having unfiled and unpaid taxes is far worse than having just unpaid taxes. If you have not filed taxes and owe, file ASAP to prevent serious penalties from adding up. The IRS has become an efficient machine at finding people that haven't filed their taxes, so don't think it is something that you may possibly get away with. The IRS will eventually catch up with you and charge you penalties on all outstanding money owed.

RELATED: 5 Questions New Business Owners Need to Ask About Estimated Taxes