Ever feel like you are part of that scene from a movie where the seagulls are fighting over a crab only it's your money and you are trying to keep a scrap of it? Here are some strategies to help you keep what is yours and ensure what you have collected for others is handled properly.
Don't Do It Yourself - You might think you are saving money, but in the long run taking care of your business taxes yourself often leads to issues. Unless you are a tax professional or accounting expert, it is best to leave the taxes to a professional whose business it is to know what needs to be done in the tax arena. After all, you are an expert in your business area so it is wiser to spend your time making your business successful than trying to figure the ins and outs of taxes. The cost of missing a tax deduction or credit, or even worse, claiming a deduction or credit you don't qualify for, can be high. A tax professional that specializes in small businesses is aware of the available credits and deductions, the annual changes in tax law that affect your business, and when and how to make your estimated payments and other regular tax deposits.
Key recommendation: Let the pros guide you when it isn't your area of expertise, it can easily be one of the best investments in your business.
Pay Employer Taxes As You Go - The US tax system is a prepay system of taxes. You are required to withhold the employee's share of Social Security and Medicare taxes, as well as any requested income taxes, from their wages each payday. You must deposit the income tax withholding and yours and the employee's share of Social Security taxes at least monthly using the Electronic Federal Tax Payment System (EFTPS). Non-payment or late payment of these employment taxes can result in a penalty of up to 100% of the payment due each reporting period. The penalty is stiff because the deposit is monies that you are keeping in trust for another taxpayer, your employee.
In addition, you -- the business owner -- are required to prepay your taxes through quarterly estimates. Not making estimated taxes can cost you additional money at filing time when the penalty for not prepaying your taxes is assessed. The underpayment penalty is the applicable federal rate (AFR) for each quarter your taxes were underpaid.
Key recommendation: The penalties, paperwork, and cost to fix always outweigh any short term benefit of paying and filing late. Remember, the IRS always, and I mean ALWAYS gets their money. Pay the taxes you are responsible for, all of them on time every time, and don't get caught in the trap of filing late and paying the additional penalties and interest that can result if you get behind -- and you will get behind without a professional.
Filing and Pay on Time - You are required to file your taxes on April 15 if you are a small business filing a Schedule C or Form 1065 (Partnership). If you are a corporation (either a subchapter S or a regular C), you must file Form 1120S or Form 1120 by March 15. IRS charges a penalty of 5% per month, up to a maximum of 25%, of the taxes due until you file your tax return. In addition, the IRS charges a 0.5% late payment penalty, up to a maximum penalty of 25%, each month you owe taxes, even when you are paying your taxes. If you are subject to both penalties in a month, you will be assessed no more than 5% for that month until you reach the maximum 25% for late filing. The total combined penalty is 47.5% (22.5% late payment and 25% late filing) of what you owe.
Key recommendation: Same as above regarding paying taxes timely, but worth repeating file tax returns on time every time. Get an extension if you need, but know that tax extensions are ONLY extensions to file the paperwork, NOT to pay the tax.
Keep Records - In addition to keeping receipts for all the items you purchase for your business you must provide additional documentation for many of your deductions. Additional documentation includes information such as who a gift was purchased for, who joined you for a business meal and what the nature of the business was during the meal, even a daily mileage log that shows where you were going when you traveled and the number of miles for each trip. In my 30 years of tax preparation, I can safely say, better recording keeping and documentation, regardless of your business size, will create better and more accurate tax deductions, easier tax preparation and more money off the bottom line come tax time. From mileage and business gifts to non-cash donations of property and hundreds of other deductions - records, i.e., documentation equals tax savings.
Key recommendation: When you don't have your records you are cheating yourself - either because you miss the deduction or you don't have the support needed to claim the deduction. Make sure you keep good records including a daily log and receipts.
Employee Classifications - Perhaps one of the biggest mistakes business owners make is classifying their employees as subcontract laborers or contractors. Subcontract laborers are easier and less costly for the business owner to have because there are no employment tax requirements, no federal unemployment tax requirements, and the pay requirements are different for laborers than they are for employers. Since the business didn't pay its portion of the taxes, it costs each employee more money at tax time. That is one of the reasons the IRS has a set of rules and tests that are applied to each business to determine if an individual is truly a subcontractor or an employee. Don't let the ease of underpaying taxes, cloud your business decisions, if you have employees and not laborers the IRS may penalize you 100% of the unpaid employment tax deposits you should have made and your state may also have stiff fines and penalties based on unemployment compensation and worker's compensation insurance requirements.
Key recommendation: Classify your employees correctly and lower risk and save money in the long run by eliminating the potential for stiff penalties and interest. Get professional help if you are uncertain.
Borrowing from the Withholding Account -Using withheld employee payroll taxes to pay for other business expenses can be tempting, but no matter what, never do this. The penalties are severe at 100% of the amount of money owed plus interest. It is illegal, yet is common and many small business problems occur after starting down this path.
Key recommendation: Do not co-mingle employee withheld taxes with other business monies. Keep them separate and pay what you owe when you owe.
No one can tell you how to run your business or manage your day to day activities because no one knows better than you what your business needs. Be sure you give your tax situation the attention it deserves -- both in time and expertise. The money you save having a professional find more and better tax deductions, avoid penalties and interest from missing or late returns, and keeping employee classifications straight, is money you get to keep. Short cuts on any of those elements rarely lead to long term economic success and more savings and money.