Tax planning is essential for all businesses, no matter the size.
Being in business for oneself can be very intense. Not only do you have to run the day-to-day operations of the business, manage employees and subs, watch your cash flow, but you have to follow IRS and CA FTB (Franchise Tax Board) rules to ensure that you are in compliance when it comes to taxes. No wonder business owners are stressed!
The IRS recently published a list of the four common errors that small businesses make when it comes to taxes.
They admonish: “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. Using IRS Free File or a certified public accountant is the easiest way to avoid these kinds of 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.”
If you are a sole proprietor or partner in a partnership, you no longer receive a paycheck and a W2 (with withholding) at year end. This means you must pay the IRS quarterly or be subject to penalty. And it’s not just income taxes! You must fund your Social Security and Medicare accounts through the self-employment tax. That’s 15.3% of your taxable profit. A horrific tax liability could suddenly develop putting you in serious tax trouble if you don’t pay attention to these requirements.
Depositing employment taxes. If you have employees, you 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. And get this, if you fail to deposit them at all, the penalty can be as much as 100% of the tax due and payable.
Filing late. Just like individual returns, business tax returns must be filed in a timely manner. To avoid a late filing penalty, taxpayers should be aware of all tax requirements for their type of business and be aware of the filing deadlines. Consult with a tax pro to determine what taxes your business is required to file and pay.
Not separating business and personal expenses. It can be tempting to use one credit card or one bank account 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. Open a separate business checking account and assign one credit card to be used for business transactions only.
It’s advisable to set up a formalized bookkeeping system like QuickBooks to record income and expenses. You can then generate financial statements which can be shared throughout the year with your tax pro to determine if your estimated tax payments are on track with the potential profit you will be declaring.
Tax planning is essential for all businesses no matter the size. Keep your fingers on the pulse.