Many small business owners approach tax season with a can-do attitude. This is admirable, but when it comes to compliance, it is usually best to leave tax preparation to the experts. Being aware of common mistakes, like failing to comply with tax laws, violating tax codes, or incorrectly filling out forms, will help you avoid errors and unnecessary stress.
Underpayment of Estimated Tax
The Internal Revenue Service (IRS) requires businesses to make estimated federal income tax payments to account for the tax not recouped through a standard paycheck. Depending on how much you owe and your business type, you will need to make payments based on the amount of income you made from the business during the year and the amount of self-employment tax you owe based on that income. Failure to make the appropriate payment will incur accuracy-related penalties. Furthermore, business owners that do not substantiate their tax position or prove reasonable cause for their position will also incur a negligence penalty.
Employment Tax Deposits
Though employment tax deposits may not seem as important as other financial obligations, failure to comply with these tax obligations will result in substantial penalties and possible criminal prosecution. Reporting your total payroll tax liability and determining your payroll deposit schedule depends on running the right report. A good payroll software or outsourced payroll company can help you manage withhold employment taxes and ensure the electronic fund transfers are accurate and timely.
While it is ideal to file your return by the IRS due date when you have all the information, there are many instances that prevent this. Late payments are acceptable so long as the IRS knows it will receive payment via an extension. The critical difference between a late filer and a negligent filer is their intention. Business owners that need to file their taxes after the April deadline should make an extension request by the tax filing deadline. If you fail to submit the request, you will incur a penalty of 5% of the amount due for every month or partial months your return is late. If you want to minimize your total bill, consider paying at least 90% of your tax liability when you request the extension. We can help make the right decision around extending versus filing. If you have questions about which is best for you, please contact us.
Failing to Separate Business from Personal Expenses
In an effort to simplify, many business owners will use one credit card, thus making it difficult to distinguish legitimate business expenses from personal ones. This results in more than just tax errors. The time an owner needs to spend categorizing expenses is quite costly to the business, and inaccurate financial information will result in inaccurate financial statements. It is never too late to start categorizing your aging personal and business expenses, and take the proper steps to begin tracking them better in 2020.
Working with a reputable tax preparer year-round can mitigate a lot of the stress that comes with tax preparation. If you need assistance or would like to talk to one of the professionals in our firm, give us a call today.
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.