Small Business Tax Tips – How To Avoid Interest and Penalties
A small business owner often wears many different hats. They might have to wear their boss hat one day, and the employee hat the next. When tax season comes around, it might be their tax hat.
They may think of doing their taxes as just another item to quickly cross off their to-do list. However, this approach could leave taxpayers open to mistakes when filing and paying taxes.
Accidentally failing to comply with tax laws, violating tax codes, or filling out forms incorrectly can leave taxpayers and their businesses open to possible penalties. The IRS encourages small businesses to explore using a reputable tax preparer – including certified public accountants, tax attorneys, enrolled agents or other knowledgeable tax professionals – to help with their tax situation. Filing electronically can also help avoid common errors.
Being aware of common mistakes can also help tame the stress of tax time. Here are a few mistakes small business owners should avoid:
Underpaying estimated taxes
Business owners should generally make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. If they don’t pay enough tax through withholding and estimated tax payments, they may be charged a penalty. Keeping up with estimated tax payments throughout the year, either by making monthly estimated tax deposits, or by sending in estimated tax payments on a quarterly basis, will keep business owners on track to not have a massive tax bill at filing time.
A good rule of thumb is that if you anticipate earning the same amount of income in the current year as you did last year, as a business owner you can look at your tax bill from last year and break it up into 4 quarters and then budget each quarter so that the quarterly estimates seem like nothing more than another business expense and not some large lump sum that you have to scramble at the last minute. Obviously, this is a simple strategy, and may not apply to all businesses.
The key takeaway is to plan ahead and not let large tax payments sneak up on you because you didn’t take the time to break them up throughout the year. That is a recipe for not only owing a balance, but for racking up interest, penalties, and hours of dealing with the IRS collections department.
Depositing employment taxes
Business owners with employees are expected to deposit taxes they withhold, plus the employer’s share of those taxes, through electronic fund transfers. If those taxes are not deposited correctly and on time, the business owner may be charged a penalty. When a business owner withholds taxes from their employees’ paychecks, that money does not immediately go to the IRS. It is held in trust by the business owner and it becomes the responsibility of the business owner to get that money to the IRS in a timely manner through the proper channels.
This is one area a business owner does not want to mess up. If it happens even once, then the business owner is playing catch-up and most likely will be late, or end up not sending in the taxes at all on multiple occasions moving forward. As the situation balloons, what often happens is that beyond the normal interest and penalties that accrue on the balances owed, the business owner may become personally liable through what is called the trust fund recovery penalty.
To illustrate how trust fund recovery works take a look through this example. Tony owns a small business and has been fortunate enough to see the business grow over the past few years. He has invested a lot of his money into the business and hired a lot of new employees. When it comes time to send in his employment taxes he realizes that he is in a bit of a cash crunch and that in order to pay his vendors, employees, and general day to day business expenses he has to use the money that should be going to the IRS for the employment taxes to cover those expenses. Eventually this becomes a regular occurrence, and then one day Tony’s business and personal bank accounts are both frozen or even emptied.
Because Tony, as the employer, was holding the IRS’s money in trust when he would withhold it from his employees, the IRS now has the ability to move beyond the corporate entity and go after Tony personally through trust fund recovery.
Just like individual returns, business tax returns must be filed in a timely manner. To avoid late filing penalties, taxpayers should be aware of all tax requirements and filing deadlines for their type of business. Also very important to keep in mind that there is a difference between payment and filing. Even if you file an extension, as many businesses do, your payment is still required to be in by April 15th. Many businesses get into trouble because they fail to keep up with their quarterly estimated tax payments throughout the year then they think filing an extension will buy them some time to clean everything up.
Unfortunately, that might actually make everything worse considering that full payment is still due in April and that interest and penalties will continue to grow on the balance until it is paid in full.
Not separating business and personal expenses
It can be tempting to use one credit card for all expenses especially if the business is a sole proprietorship. Doing so can make it very hard to tell legitimate business expenses from personal ones. This could cause errors when claiming deductions and become a problem if the taxpayer or their business is ever audited. Simply sticking to a plan of using business accounts and credit cards on the business and not intermingling personal finances with those accounts will make a small business owner’s life much easier come tax time.
We Solve Business Tax Issues
You can get IRS audit help by contacting a tax professional who understands the fears you’re experiencing and will do everything possible to alleviate them. Use our free initial tax consultation with a licensed tax attorney at the W Tax Group to identify any potential business tax issues. Call us directly at 1-866-746-1534 or fill out the online.