Many small-business owners can get in trouble with the IRS or state taxation departments for not paying their income, payroll, sales or use taxes. I still remember the day in the 1990s when two state department of revenue agents showed up in the reception area of my company. Seems we hadn't been “timely” on remitting to the state the sales tax we'd collected from our customers.
Keeping track and paying all the different small-business taxes is complicated. Some of the most common taxes you may be responsible for include:
- Income tax, a federal tax you pay that's based on your company's profits. Depending on your business structure, this income may flow through to members or shareholders. Estimates need to be paid quarterly to avoid penalties.
- Payroll tax, which has two parts. You are responsible for collecting this tax from employees’ paychecks and remitting it to both federal and state governments. There's also an additional payroll tax you pay to partially match the employee portion. Complicating this is the fact that with more remote employees, many companies have to pay payroll taxes to multiple states.
- Sales tax, which is collected from customers upon the purchase of goods and services and is remitted to the states. This tax has become trickier in recent years as different states access tax on different products and services. In an effort to collect more money, states have also expanded the definition of who has to pay a sales tax to include customers outside the state if the company has a “presence” in that state.
- Usage tax, which you pay if you buy a product for its own use rather than for resale. For example, if you buy a printer from out of state but use that product inside your company, you owe a usage tax to your state government.
You may also be responsible for a variety of other local taxes. In New York City, for instance, there is an unincorporated business tax (UBT) of 4 percent on pass-through entities like limited liability companies, S corporations and sole proprietorships.
Dealing With Regulators
All these tax obligations need to be met by your company in a timely manner as dictated by various federal and state deadlines. If your small business makes a mistake and the IRS or other tax entity comes calling, the following four steps can help you navigate the process. (Please consult with your lawyer or financial advisors to set the best course of action.)
1. Don’t panic—breathe. Whether you get a letter in the mail or agents show up at your office, now is not the time to ignore what's happening or to panic. If someone visits your business's locations, calmly listen to what they have to say and what is needed. Don't say too much other than, “Thank you. I need to do some research and talk with my accountant now.” Remember, people from these agencies don't want to close down your business; they simply want the tax obligations to be paid within a reasonable time frame. They also don't expect instant answers.
2. Call your accountant. Contact them immediately after receiving a formal letter or visit, and send them the notice. Accountants who've worked with businesses generally have a lot of experience dealing with these matters and will have good advice on what you should do next. Assign them “power of attorney,” and ask them to deal directly with the agencies that are involved. Meet in your accountant’s office, and only participate in meetings that are required. Again, only answer questions that are asked of you.
3. Collect the documentation for your accountant. More detail is better than less. If you're any missing information, be honest about what you don't have—never fabricate any documentation.
4. Consider making a settlement offer that's less than the amount your company owes. Ask the agency to waive any interest and penalties. Be clear about your ability to pay and any financial limitations you may have. Then, stick to the payment schedule when it's been worked out with the tax agency.
Overall, be patient with the entire process. If you're unable to meet a financial tax obligation, don’t wait to be notified by federal or state agencies. Be proactive, and write them to discuss alternate solutions. And, once this issue is resolved, put company procedures in place so this never happens again.
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The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any tax strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL TAX ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.