When small businesses are starting out and reaching sustainable profitability, they commonly have difficulties with cash flow. If this occurs, a business may have issues with its short-term working capital, the money needed to take care of usual expenses associated with operating the business. Depending on the severity of the cash flow problem, business owners may be tempted to use money that has been withheld for upcoming tax payments with the expectation of replacing it as soon as possible with future cash flow. This is a mistake – often, the funds can’t be replaced on time.
The penalty for late tax payments is 5% of the balance owed plus 1% of the balance owed for each full month the payment is late. These penalties can compound a cash flow problem. Find other solutions to a short-term problem instead of utilizing previously earmarked funds.