Many small business owners approach tax season with a can-do
attitude. This entrepreneurial spirit 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
What happens when a business owner yields their
responsibility to meet employment tax obligations in favor of meeting payroll,
debts of nonpayment, or trade obligations? Though it may not seem as important
as other financial obligations, failure to comply with employment 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
The IRS is a stickler for accurate and on-time payment. The
latter is almost a rite of passage for many business owners that need more time
to produce a precise return or take advantage of all their deductions. 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 with Form 4868 by the tax filing deadline. If you
forget 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.
Keep in mind that with your tax extension also comes another
deadline. If you fail to make the payment again, you will incur the 5% penalty
above. And finally, when you pay later, you pay more. Even with the extension,
the IRS will collect interest on any amount outstanding after the April
deadline. In addition to this interest payment, you may also pay a late-payment
penalty of 0.5% per month of the late unpaid tax. 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
This step is the year-long headache that reaches maximum tension
at tax-time. 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. Overlooking this critical step 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 may feel like it’s too late, but it is never too late.
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.