Every person in the world feels that they do not have to do right by the tax man. So why would you think someone running a business would be any different? Every day business decisions are made that revolve around cash flow and who always gets the short end of the stick? The owner’s salary (which is another blog) and the IRS.
The problem is the IRS will eventually show up to collect.
Here are the top four tax mistakes that I have seen countless business owners make and how they can hurt you and your business.
Not making estimated tax payments.
When you work at a job as an employee, income taxes are withheld from your check like clockwork. The company you work for then sends the money on a regularly scheduled date to the IRS and the state for which taxes were withheld. So from your perspective you are good. You are covered. Your only concern is did they withhold enough. As a business owner you need to be making these payments yourself. Even if you are on payroll for your own company, you should still be making estimated tax payments four times a year. Because your paycheck withholding’s, if you are taking a paycheck, will more than likely not be enough. These estimated tax payments are based on the income your business earned during that particular quarter. And your business entity type doesn’t matter – you still need to pay them. The type of entity will only determine whose bank account the check is drawn on.
Minimally you are required to make estimated payments that are equal to the amount you paid in total in the prior year. If you don’t pay that you will be charged penalty and interest. And if your income is considerably higher or lower than the prior year, your tax professional can make the necessary adjustments to ensure that you don’t have any surprises come April 15th. That is if they provide proper tax planning as a service.
Not paying payroll taxes.
If your company has employees, you are required to withhold and remit payroll taxes. You cannot pass go and keep the $200. You have to pay the banker; or in this case the feds. Many business owners pay the employees and due to poor cash flow management, they end up keeping the taxes withheld from employee checks and using it for other business operating expenses. This is a HUGE mistake. In case you do not know, there are penalties and interest for not paying those taxes. BIG ONES! Ridiculously LARGE ONES! I mean GINORMOUS ONES! You get my point?
While I don’t advise that you get in trouble for not paying any type of taxes, you most definitely do not want to mess with payroll taxes. They are the worse kind of taxes to be in trouble with. See you are not messing with your money; you are messing with your employees money. It is your fiduciary responsibility to pay those taxes and to pay them on time. And failure to pay can put you at risk for criminal prosecution.
Not filing the tax returns.
Now I mentioned the big, large ginormous penalties and interest for not paying taxes, but there are also penalties and interest for not filing the forms. And those fines accrue by the minute. Or at least it seems they do. They definitely accrue daily. If for some reason you are unable to pay your payroll or income taxes on time, you still need to submit the tax forms. Do not withhold the forms because you could not pay because you were told it would raise a red flag. Um no, it will raise a bigger flag if you do not submit anything.
Not hiring a professional tax preparer.
We are in a world of D-I-Y, Do-It-Yourself. And many times business owners try to save a few pennies and attempt to do their accounting and taxes themselves. Can you say O-M-G! Don’t do it unless that is the business service you provide. Just because you are capable of doing it does not mean you should. Stay in your wheelhouse. Stay in your lane. Because the tax law does in fact change every second, you are more than likely going to have several mistakes. So please seek a professional tax preparer to file your taxes. Not only will they prepare your return accurately, they will also more than likely advocate on your behalf if you do in fact receive a tax notice. In addition, they can provide the tax planning I mentioned above to help you avoid receiving any tax surprises. That is the one surprise no one likes.
What tax mistakes have you made in your business?
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