Many taxpayers lump together penalties and interest, thinking that they are the same thing. However, nothing could be further from the truth.
If you owe taxes, the Internal Revenue Service (IRS) will calculate interest and penalties based on the amount owed. But this is just the beginning.
There are two types of penalties to be aware of:
Failure to File Penalty
As the name suggests, this penalty is assessed when you do not file your final tax return on time. The penalty is based on the time from the deadline (like April 15 for personal income tax returns) to the date that the return is filed.
For each month the return is late, a five percent penalty is assessed. The maximum penalty is 25 percent of the total amount due.
Failure to Pay Penalty
This penalty is based on the amount of tax that you owe along with your return. At 0.5 percent per month, this penalty is much smaller than that associated with failure to file. One main difference is that the failure to pay penalty has no maximum limit. You are assessed this penalty until your balance is paid in full.
What About Interest?
Regardless of your reason, the IRS can and likely will charge interest on late or unpaid taxes. Interest is calculated based on the amount of back taxes you owe.
The IRS interest rate changes every three months. The amount that you pay this month may not be the same as you pay in the future.
Interest is calculated daily for as long as you have a balance due.
As you can see, the difference between tax penalties and interest is pretty simple to understand. Penalties are assessed for the failure to file a return or failing to pay on time.
Interest, in a similar fashion to the failure to pay penalty, is charged on late or unpaid taxes.
What does all this information mean to you? As long as you pay in full and file on time, you never have to worry about being charged penalties or interest.
Using a payroll service that guarantees on time and accurate filings and payments is always your safest best.