Running a small business is complicated enough without having to deal with unwanted attention from the Internal Revenue Service. Here are some tips intended to help small business owners stay on Uncle Sam’s good side and avoid tax trouble.Tweet This
1. Keep Accurate Records
Impeccable record keeping is an essential part of avoiding tax issues. Small business owners should be able to substantiate deductions, expenses, income, and debts to ensure their tax payments are accurate. If you have receipts, invoices, and other important documents on hand, you may be better prepared to answer questions from the IRS. The government recommends holding onto these records for at least 3 years (or indefinitely if certain conditions apply).
2. Know Your Deductions
Many small business owners neglect their deductions, and in doing so, leave money on the table. It’s important to figure out which small business tax deductions you can claim, and the rules and regulations governing each.
Keeping an office at home may result in a sizable deduction, as can client entertainment expenses, and the rules surrounding these deductions are sometimes more lax than business owners realize. That said, avoid any temptation to get creative with your tax deductions, as this can land you in hot water.
3. File and Pay on Time
When it comes to taxes, procrastination can cost you. Small businesses who file or pay late may face penalties. The extra cost of filing late can be 5% of the unpaid taxes per month (or portion of a month), up to a maximum of 25%. Penalties for late payment can reach a maximum of 25% of what you owe, for a total of 50% in penalties. Save yourself money and trouble: file and pay on time.
4. Stay on Top of Your Estimated Taxes
If you’re self-employed, you’ll need to make estimated quarterly tax payments. These taxes fund programs such as Social Security, and the self-employed must pay them just as an employer would. While traditional employees have this money withheld from each paycheck, the government requires the self-employed to pay what they owe four times per year. Keep track of the estimated tax deadlines, and don’t forget to forward what you owe to the state, as well.
5. Be Careful When Managing Independent Contractors
Hiring independent contractors is often far less expensive than taking on employees, as it allows small businesses to avoid paying payroll taxes. But if the small business owner fails to comply with strict employment guidelines, the freelancers may actually be seen as employees under the law. Even something as simple as setting regular work hours for a contractor can run afoul of the law.
This mistake may trigger an audit that could result in payroll, workers compensation, Social Security, and other tax liabilities, along with unemployment insurance premiums. Consult with a payroll professional for guidance on hiring freelancers.
6. Hire an Accountant
Not all small business owners are skilled accountants, and outsourcing bookkeeping duties to a professional is often a smart business move. It gives business owners the peace of mind of knowing that their taxes will be done correctly, and allows them to concentrate on doing what they do best.
An account can also help you manage your cash flow so your business is never in a crunch. Learn more about forecasting your flow and managing your company’s finances.
Photo Credit: rexcuando,Twenty20