You might be surprised to learn that filing a tax extension does NOT mean that you have an extra five or six months to actually pay your taxes.
This may be pretty confusing to the average taxpayer. Why would you bother with a tax extension if you still have to pay on time? (Which is to say, March 15 for business taxes and April 15 for personal income taxes).
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Because you still might save money. Tax extensions give you extra time to prepare the most accurate and advantageous return possible–but the Feds still need the money you owe. If it turns out that you’re due some money back, you’ll get a refund. If you discover that you owe even more, you’ll have to pay it. But whatever your tax liability is on March or April 15, you have to pay it at that time.
What Happens if I Don’t?
If you don’t pay your income taxes by the standard deadline (March or April 15), you’ll have to pay a penalty that accrues each month your taxes stay unpaid. If you don’t pay by the time your extension is due (Sept. 15 for businesses and Oct. 15 for individuals) you’ll start accumulating interest fees as well.
The late payment penalty is typically 0.5% of your tax liability, calculated each month. For example, if you have $1,000 of unpaid taxes, you will accrue $5 every month, starting in March/April, until you pay.
Now, if you filed for a tax extension and you haven’t paid by that deadline, you will begin to accrue interest on your unpaid taxes. This interest is usually 5% of your outstanding balance per month. If your taxes are paid more than 60 days late, you’ll pay a minimum of $100 in interest.
Example: Let’s say you file a personal income tax extension, but it’s Nov. 15 and you still haven’t paid the $1,000 you owe in taxes. This means you now owe $1,030, which is your balance plus six months’ worth of late fees at $5/month. In addition, you’ll owe an additional 5% in interest, which is about $51 for November. So as of November 15, you’ll owe $1,081 instead of the original $1,000.
The lesson here is: File an extension, but pay your taxes on time!
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Author: Chaney Rankin
Chaney Rankin writes for FileLater.com, an online tax extension service
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