Dealing with taxes on top of everything else you handle as a small business owner can seem overwhelming, and deadlines have a way of sneaking up on you when you’re busy. Because of this, it’s easy to make common small business tax mistakes and put yourself in a position where you could face penalties from the IRS.
Taxes aren’t one of those things you can put on the back burner as you’re managing the hustle and bustle of your business. Compliance is essential if you want to stay on the up and up with the government, and maintain your good standing as a business owner.
But it’s not all about your reputation. Failing to comply with tax laws can be expensive.
At first, you may just receive a notice from the IRS stating you owe back taxes or a small penalty payment, which is a signal to get compliant as quickly as possible. Fix the problem when you get the notice, and you have nothing more to worry about.
However, if you don’t heed small business tax advice and get your tax payments back on schedule, you could be subject to:
Letting things get to this point makes a lot more work for you and any accounting professionals you have on your payroll. You’ll find yourself facing mounds of paperwork for back taxes. And not to mention, taking quite a bit more out of your tax budget than expected just to cover penalty payments.
Should you continue to remain noncompliant, you could lose your business. The IRS expects all entities to pay taxes to keep the government and its programs running. Late or missed payments affect cash flow at a federal level in the same way unpaid invoices affect business accounts.
While there’s no reason to live in terror of mistakes on your tax return, you should be mindful of common errors. Here are five potential pitfalls to watch out for when preparing your small business taxes.
One of the first things you should do when starting a business is open a dedicated bank account, and sign up for a business credit card. Use these to make purchases and cover daily expenses, instead of pulling money out of your personal accounts for business, or vice versa.
This can get a little tricky if you’re a sole proprietor or independent contractor. In this case, you may want to consider giving yourself a salary instead of taking an owner’s draw every time you need cash. Otherwise, you have to keep extremely detailed records of which expenses are for business purposes, and which are personal, so that you don’t have to try and figure it all out when taxes are due.
If you need another reason to separate your expenses and keep meticulous records, how about saving money? Many small business owners miss out on deductions and wind up paying a lot more in taxes than is necessary.
Common deductions include:
The catch? Anything you don’t track, you can’t take. Write down all applicable expenses, and save your receipts throughout the year to maximize your deductions.
On the other hand, you can also go too far and claim deductions to which you’re not technically entitled. Some deductions, such as meals, entertainment and moving expenses, were eliminated in the tax reforms of 2018. Consistently showing higher expenses than average for your industry may raise red flags with the IRS.
Everybody knows about the big Tax Day on April 15, but you’re also obligated to file quarterly taxes if:
Falling into one of these categories means you must send in estimated tax payments by January 15, June 17 and September 16 in addition to your yearly tax return. Failing to do so can incur a penalty of as much as 5% per month, up to 25% of what you owe.
If your payment is 60 days late or more, you get hit with another penalty of either $100 or 100% of your tax bill, whichever is smaller.
Taxes related to employee wages and expenses are a big part of your business tax obligations. Every time you process payroll, you’re required to take out withholding taxes, which are made up of income taxes and Social Security and Medicaid (FICA) taxes. Your deposit schedule is based on the amount you withhold and may be daily, semi-weekly or annually. Reporting dates for total taxes withheld may be quarterly or annually.
Each quarter, you’re required to pay a matching amount of FICA taxes for each employee, along with other expenses, like federal and state unemployment insurance.
You may be obligated to pay additional taxes depending on your industry. If you don’t meet both tax requirements, you could face an audit, fines or legal trouble.
In the present “gig economy,” it’s common to have both traditional employees and independent contractors working for your business. Making a mistake in the way you classify your workers leads to problems with your taxes and subsequent penalties.
For example, if you label an employee as an independent contractor in error, the IRS will fine you:
You may also be subject to fines or other consequences for withholding benefits from misclassified employees.
Unless your business is very small, you can quickly become overwhelmed trying to manage the detailed bookkeeping necessary to avoid common tax mistakes. Accounting gets more complicated as your business grows, and forgetting just a few records can affect your entire tax return.
Outsourcing to a third-party bookkeeping service shifts to a dedicated professional or team. Drawing on training and experience, bookkeepers are able to:
This frees you from spending hours on financial matters and ensures you have the clear, accurate records you need to avoid making mistakes during tax prep. If your bookkeeper uses cloud-based software, you should also be able to log into a dashboard at any time to review data and generate reports.
When tax time rolls around this year, consider getting in touch with a bookkeeping advisor from National Business Capital & Services to find out how switching to third-party accounting services can help your business remain compliant.
But if business is moving right along and your team is growing, then outsourcing to an agency might not be enough. Having a dedicated bookkeeper on staff can help you keep your ducks in a row, especially during hectic tax seasons.
Having access to a business line of credit can give you the freedom to spend on any upcoming expenses, including salary and benefits for your new bookkeeper, as they come up. If tax time rolls around and you’re unprepared to make the full payment, a line of credit can also help you stay compliant, instead of risking consequences down the line.
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