Today we’re going to answer the question: what’s the difference between
interest and penalties? It’s a term you’ve probably heard
before but often used together. Interest begins the day that the
government expects their money. For a personal individual,
that’s April 30th. You have the year of January to December;
taxes need to be paid by April 30th. Beginning May 1st there’s an interest
rate that’s accrued on that. Now, right now as of the time of this filming, the interest rate of the government
is 5% per year. It’s not very high, but the government does expect
their money. If you don’t pay them, they can garnish or they can come
after your bank accounts. Now, what’s a penalty? A penalty is applied if you are late
in filing the forms that are due. As a sole proprietor, you may have
heard that your due date is June 15th. Now your taxes are still due April 30th
but if you file your taxes on June 16th then the penalty is equal to 5% of
the taxes that you owe and for every additional month that you’re late,
there’s an extra percent. So if you don’t owe any taxes, you can see right away that there’s
no penalty and there’s no interest. So if you owe your taxes or if you’re
getting a refund then there’s no rush to get your taxes done.
However, if you do owe taxes and if you file late,
then there’s a penalty. Now the deadlines, there’s different deadlines for every
single business and every single avenue of the way to pay the government such
as payroll or GST, corporate taxes. And those are something that you’ll need
to find and keep track of and be aware of. However, in general, a good rule of thumb is it’s
three months for a corporation, three months for a partnership
and four months personally. And if you can keep those in mind, then you should be good because you’ll
be able to get your taxes filed before you even have interest.
Penalties come usually a little bit later. Now a word of warning.
If you are late often, then the penalty actually
can become doubled. So if you’re late one year and then if
you’re late again within the next three years, the penalty that you pay is then doubled
to 10% of the taxes owing plus 2% per full month additionally that you’re late.
So do be aware of your deadlines. Make sure you get your information into
your advisor or your preparer on time, and make sure that you get things paid. Paying taxes to the
government can be painful, but paying interest and penalties to
them on top of that can be far worse, especially since the interest
and penalties you pay to
the government are not a tax deductible expense.