With the myriad responsibilities that come with running a company, it’s not surprising that business taxes aren't at the top of the list for many small-business owners. As a result, some tax requirements get overlooked—resulting in nasty, often costly surprises.
Avoid making common tax mistakes and suffering the consequences by keeping the following expert tax advice in mind.
Understand All the Tax Authorities You Owe
When you’re new to business, the sheer number of taxing authorities and the resulting time and expense can be overwhelming, but it’s important to educate yourself about what’s required, says Janet Lee Krochman, CPA, whose firm works with small businesses on tax planning and compliance. “Besides the obvious IRS and related state agency, there are sales taxes, property taxes, payroll taxes, local taxes, excise taxes, self-employment taxes and other specialty taxes.”
It’s not uncommon to be stunned by the many different types of taxes that must be paid, especially if you have employees, agrees Jessie Seaman, a licensed tax professional and senior associate staff attorney at Tax Defense Network. “In addition to IRS taxing requirements like unemployment, each state, county, locality and district has its own filing and paying requirements," Seaman says. "In just one year, a small business with three employees could end up with more than 10 to 30 tax returns that need to be filed with federal and state revenue agencies.”
The many tax returns also tend to be complicated, which often means that when small-business owners without a tax background go DIY to keep costs low, errors occur, which can cost hundreds or thousands in penalties and interest for errors, Seaman says.
Don't Ignore Self-Employment Taxes
Self-employment taxes and the estimated tax payments that come with them are often overlooked, Krochman says. Generally, you must pay self-employment tax if you net more than $400 from your business, and most of that money earned is subject to self-employment tax.
“For a non-corporate business, the amount of self-employment taxes can double the overall impact of taxes on the income of the individual owner[s],” Krochman says. “You must also make quarterly estimated tax payments in order to avoid tax penalties and interest.”
Making estimated tax payments also prevents you from having a walloping tax bill come April, says Robert Skrob, a CPA who specializes in customer generation through associations. “It’s best to pay the government throughout the year, or to save the money,” he says.
Outsource Your Payroll
One area of small-business taxes that’s especially complicated and potentially costly when you make a mistake is payroll. “Having employees is a huge responsibility that comes with many filing and tax-payment requirements and hefty penalties even when you are just a day late or have paid the incorrect amount,” Seaman warns. “It doesn't take long for a new business to go belly up because payroll taxes were not properly paid. Even if you choose a corporate structure or LLC for the personal liability protection, this is not a blanket safety net; the IRS can hold officers liable for nonpayment of payroll taxes. Hire a payroll company. The fee is nominal for the benefit, and they are experts.”
It’s also more secure for your company to get the payroll function out of the office and into the hands of a professional payroll company, Skrob notes. “Payroll checks and payroll tax returns are a common way for bookkeepers to defraud their employers,” he says.
Keep Your Records Up to Date
Tax time will go smoothly if you keep your annual accounting up-to-date, Krochman says. “No small-business owner wants to spend the time to recap an entire year’s worth of receipts, checks, credit card payments, etc.,” she says. “The project can become overwhelming and is usually done in a panic, which means items are missed and the stress level is higher than it needs to be."
By taking a half hour a week to enter transactions, tax time runs more smoothly and estimated taxes can be quickly and easily calculated. If you require financials for a bank loan or insurance coverage, the numbers will also be at your fingertips.
Keeping your financial records up-to-date also helps you monitor the progress of your business, Seaman adds.
“Many small-business owners do an annual accounting to prepare their tax returns, but that doesn't enable them to know how much money they’re making throughout the year. In order to maximize profits, you need to have a clear idea of how the revenue is being spent and what can be cut back," Seaman says. "There’s always time to increase net profits—having your financial records up-to-date makes that possible.”
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