We want you…to be successful! Yes, that’s right. The common adage proffered by Uncle Sam himself applies to this situation as well; however, it’s not quite what you think. With small businesses serving as the keystone for business development in the nation today, it is increasingly important for business owners to be aware of federal regulations and laws. One of the key parameters within which small businesses must function is the jurisdiction of the IRS. By paying appropriate taxes and maintaining effective records of payments, small businesses can make gains toward becoming and remaining successful.
Mistakes to Avoid
1. Filing late. Submitting a late tax payment is one of the absolute easiest mistakes to avoid. The IRS can and will tack on an additional penalty fee for late payments starting at 0.5% and ranging upwards of 25% depending on the type of tax owed and the extent to which the payment is late. It clearly pays to pay on time, so keep track of deadlines.
2. Intermingling accounts. Intermixing business and personal accounts is a common problem among small business owners; however, this practice is extremely detrimental to business and is fairly easy to circumvent. To avoid commingling accounts, business owners should initially set up an independent business account and use it solely for business purposes. To pay a personal salary and/or business royalties, the owner should be sure to deposit funds into a separate personal account.
3. Classifying the business incorrectly. Determining the business’s classification and functioning within it is one of the most important steps toward financial success regarding tax payments. A wide range of business taxonomies exist including sole proprietorships, partnerships, spouse partnerships, subchapter S corporation, and C corporations. Each business type functions on its own tax system. Identifying this classification at the onset of the business will save time and money.
4. Paying taxes irregularly. While most business owners are familiar with paying personal income tax annually, this is quite different from business tax payments. Small business owners are required to pay taxes quarterly on an estimated scale. Failing to make and pay tax estimates quarterly causes a business to incur additional tax fees at the applicable federal rate (AFR). The easy way to elude additional fees is simply to make tax estimates based on quarterly business and pay on time.
5. Not keeping track of everything. The rule of thumb is documentation, documentation, documentation. One of the easiest pitfalls to avoid in business is not keeping accurate documentation of profits, expenses, or anything money-related. To claim deductions, businesses must have accurate documentation as per the IRS requirements. Keeping receipts, recording business transactions, and identifying expenses and revenue must all be included in an accurate record of business transactions.
6. Differentiating labor classifications inappropriately. Failing to appropriately classify employees can be problematic. Whether listed as a contractor or not, if the IRS determines that the business is scheduling a worker, establishing the amount, direction, and location of work, or providing tools for the job to be completed, the “contractor” is no longer considered as such and should be receiving payment and benefits as an employee. In this case, the employee would be due shares in Medicare and Social Security taxes, and the IRS can penalize a business up to 100% on late payroll tax deposits. Escape this situation altogether, and list employees appropriately.
7. Not getting advice. While it may seem like a time and money saver to figure out all things taxes independently, getting advice can actually help a small business owner save money (and time). Hiring a professional can help you claim additional deductions and make sure your reporting is accurate.
While the tax situation can be a difficult one to navigate, knowing and abiding by a few basic premises will go a long way toward making your business successful. Avoid these 7 mistakes and you and your business will be on the road to greater success.