This study examined the role of tax penalties on timely tax compliance among 100 small and medium enterprises (SMEs) in the food industry of Davao City. Using a quantitative research design and purposive sampling, data were collected from SME owners and managers via structured questionnaires. Tax penalties were measured through default and late payment penalties, while compliance was assessed based on filing accuracy, record maintenance, and registration. Descriptive statistics and Pearson’s correlation coefficient were applied to analyze the relationship between variables. Results showed a high level of awareness of tax penalties (mean = 3.16) and a high level of timely compliance (mean = 3.40). A strong positive and statistically significant relationship was found between tax penalties and timely compliance (r = 0.717, p = 0.001). The study concludes that awareness of penalties significantly influences compliance behavior. It recommends strengthening tax education initiatives and establishing better feedback mechanisms between tax authorities and SMEs to ensure long-term regulatory adherence and economic resilience.