Accounting & Finance
Avoid the Wrath of the IRS: How Businesses Can Stay Out of Tax Trouble
Do you feel anxious during every tax season? You’re not alone! Did you know that over half of Americans don’t feel confident about understanding the tax code?
That said, if you run a business, it’s essential that you do everything you can to stay out of tax trouble. Let’s get into what you need to know.
Whether you have one employee or several hundred, you must stay on top of your organization throughout the year. It sounds like a no-brainer, but you’d be surprised at how many business owners struggle in this area.
Set up both a digital and physical space to store tax-related documents. The physical space (like a folder) is for any mail or hard materials. The digital space is for any scanned documents or electronic forms.
Simplify your taxes throughout the year by using a bookkeeping system like Quickbooks, Wave, or Freshbooks. You can customize these bookkeeping systems to track all relevant information at a reasonably affordable rate. This information includes your:
- gross and net income
- gas mileage
- invoice copies
If you don’t have a physical bookkeeper, these software systems can do the job for you- at a low, monthly subscription rate.
If you do have a bookkeeper, make sure that you’re aware of the current organization system. You should know how he or she is storing and assessing your information.
Hire An Accountant
Unless you’re extremely knowledgeable in the tax code, you should outsource your taxes to a professional. Business taxes are significantly different from filing a simple, personal tax return.
Furthermore, an accountant will represent you in the event of getting audited. Cheap software can’t do that for you.
Best of all? Even though a CPA will likely cost you more “upfront,’ you may end up saving more money in the long run. That’s because a CPA will probably locate deductions you may have otherwise missed.
To find a CPA, you can start by asking friends or family members for recommendations. You can also check online directories for reviews.
Make sure that the CPA has ample experience in small businesses. All accountants have their specialties. You want to make sure that they feel competent to take on your business’s tax needs throughout the year.
Classify Employees Correctly
Many business owners hire independent contractors to avoid the taxes associated with standard employees. After all, employers do not have to withhold taxes for independent contractors. They also typically don’t have to provide any sort of company benefits.
However, independent contractors need different requirements from regular employees.
First, you should avoid having contractors do the same work as other employees. You should also require that contractors provide their own appropriate insurance for the type of work provided.
You don’t want to provide a contractor with a standard ‘job description.’ Instead, you simply need to provide a specific list outlining the projects that need to be completed.
If you misclassify an employee as an independent contractor, you could be held liable for tax fraud. This occurs whether or not you were aware of this rule.
Furthermore, if you are self-employed, you are always responsible for both sides of the payroll tax. This means that you should prepare for larger tax liability come tax season.
Be Careful With The Home Office Deduction
People used to worry that home office deductions automatically triggered tax audits. While this isn’t the case, you still need to follow a specific protocol if you intend to take this write-off.
First, you must use your home regularly and exclusively for business-related activity. This means that the room cannot, say, double as an office and a playroom for your child.
If you meet these criteria, the IRS will permit you to deduct:
- rent or mortgage
- property and related estate taxes
- repairs and maintenance
- other home-related expenses
The IRS has made it simple to deduct your home office space. If you use less than 300 square feet for your office, you earn $5 per square foot.
If you plan on deducting this expense, you must maintain detailed records of all business purchases you intend to deduct.
Make Your Estimated Payments
Self-employment has plenty of advantages. You get to make your own hours, be your own boss, and make as much money as possible. Right?
However, you’re also on the hook for being completely accountable for your tax situation. There is no employer to withhold your state and federal taxes from each paycheck. Instead, you need to pay as you go along.
If you don’t pay enough in your estimated tax payments, you may be charged with a hefty penalty. This penalty applies even if you qualify for a refund.
You can refer to last year’s tax balance (or check with your CPA) to estimate the current year’s liability (click here for more information).
You’ll need to set aside the appropriate amount for your quarterly payments. These dates are April 15, June 15, September 15, and January 15 (of the following year).
Final Thoughts On Avoiding Tax Trouble
At the end of the day, honesty is all that matters when it comes to filing your taxes. If an audit does happen, you won’t have anything to hide.
Remember to save all receipts and necessary paperwork. This will help you to substantiate any claim promptly and effortlessly.
The chance of getting audited remains very low. However, being honest with your intentions can increase your chances of staying out of tax trouble.
Does your small business owe taxes this year? We’ve got you covered. Check out this article!