America’s economy is built on the backbone of small business. In 2016, of the 5.6 million employers in the US, firms with fewer than 500 workers accounted for 99.7 percent of all employers. From 1993 to 2016, small businesses created 61.8 percent net new jobs.
Of course, being a small business owner comes with many challenges. These include everything from creating a website to marketing your business and finding skilled employees.
While not necessarily the most glamorous aspects of running a business, ensuring employees and bills get paid is critical. While we’re on the topic of the not-so-fun aspects of owning a small business, let’s talk about the elephant in the room, business taxes.
They can make or break your business. So, it’s crucial that you get a handle on taxes now before the IRS starts sending collection notices. Read on for the tips you need to plan ahead for small business taxes.
Don’t Let Business Taxes Paralyze You
Does just hearing the word “taxes” or “IRS” put you in a cold sweat? If so, you’re not alone. However, don’t let this turn into an excuse to procrastinate or remain disorganized when it comes to the IRS.
Instead of putting off the inevitable, proper planning and organization prove essential components of preparing for tax time.
This means implementing processes to organize your taxes that are repeatable throughout the year. This also means performing these processes consistently.
If you don’t get a system in place now, your company risks drowning in debt later.
What You Need to Know About Small Business Taxes
Besides tax anxiety, there are a plethora of other concerns that small business owners must manage. These include things like cash flow, employee legalities and more.
Particularly when you’re in the early stages of launching a new business, many taxpayers fixate on revenue. After all, they not only need to break even on their business, but they also need to make enough for personal expenses.
It can be tempting within this context to put off paying taxes until other debt obligations are handled. Many taxpayers choose to pay immediate expenses before giving the IRS its due. However, this can prove a costly mistake.
When taxes go unpaid, you may not receive a notice right away. That’s because it takes time for the IRS to start communications. However, don’t let the initial delay fool you.
Notices will start coming, and when do, you could be in for some startling news. Small business owners who fail to pay back taxes can face everything from liens to levies against their businesses.
These can result in loss of customers and revenues when you need them most. It can also lead to cash flow problems and the eventual closure of your enterprise.
Know Your Business Type
Businesses can be set up in a variety of ways. These include sole proprietorships, a general partnership, an LLC, or a corporation.
When it comes to taxes, paying employees and more, the way you structure your business matters, for example, a sole proprietorship reports its expenses and income on a Schedule C. This is also known as a 1040.
However, when it comes to corporations and partnerships, they use different tax forms. Partnerships and S-corporations are taxed as pass-through entities. That means they get taxed at the individual level.
How to Avoid Legal Penalties
Knowing how your business is organized from a legal standpoint will help you better understand things such as the importance of HIPAA Requirements, as well as your tax obligations to the IRS. It’ll help you decide whether or not you have to pay quarterly tax estimates and much more.
Also, while we’re on the topic of quarterly estimated taxes, don’t skip out on these. Quarterly estimated taxes are due in mid-April, June, September, and January. They are not optional.
If you fail to pay quarterly estimates on time, you’ll rack up penalties on top of the taxes you owe.
It would help if you also had a thorough understanding of how to report your employees to the IRS. In other words, you need to know the differences between employees and sub-contractors.
According to Romaker Law, business owners are held fully responsible when it comes to payroll taxes for their employees. This includes timely payroll returns and deposits. It also means dealing with state returns and deposits where applicable.
Like quarterly taxes, if you skimp on payroll taxes, you’ll get left holding the bag. The IRS has the authority to charge you both penalties and interest for missed payroll taxes.
So the worst-case scenario? These taxes can even be personally assessed to you, the business owner.
Other Problems with Unpaid Taxes
When it comes to unpaid taxes, they can get you in a variety of ways. Not only do you risk raising the ire of the IRS, but you end up with an inaccurate accounting of your business profits and losses.
This can negatively impact your operational budget. For one, when you don’t pay taxes on time, it can lead to a false sense of security. You may feel that you’re raking in more profits than you are.
It can even result in a business operating at unsustainable expense levels. (Since they assume they have more money than they do.)
Also, when the IRS finally does catch up with you, they could surprise you with a bill that you can’t even begin to scrape together.
Think Consistent When It Comes to Recordkeeping
Think of consistent tax recordkeeping as a way to better understand your enterprise’s actual financial state. It should be done consistently. This means a minimum of once per week.
That way, you’ll not only be able to decide how much your business owes, but you’ll also build a more thorough understanding of how your business is performing.
It is knowing where you stand, which matters for a variety of reasons. After all, the IRS has been known to make mistakes. If you’re able to catch errors in their assessment, you may be able to reduce some of the debt you owe.
For this and so many other reasons, it makes sense to hire a tax professional to help you keep track of your company’s earnings and expenses. That way, you’ll have a more solid case if an IRS mistake does happen.
Keeping up on these records will also help you ensure that you’re not missing out on claim expenses. Trying to wade through a year’s worth of receipts on April 14th will result in inaccuracies, and many missed exemptions and deductions.
Businesses that are Already in Legal Trouble
What do you do if you already find yourself in the unenviable position of owing unpaid taxes? Remember that time is of the essence.
Don’t put off getting to the bottom of the problem any longer. Or else your issues with the IRS will balloon.
There are a variety of legal options available to you. Especially when it comes to paying off a tax debt.
However, what if your business also proves unable to meet its current tax obligations? Then, it would be best if you made financial adjustments ASAP.
Paying off your current taxes in a timely fashion is paramount to your business’s future success and financial health. Only then should you conquer back taxes.
When it comes to legal assistance, get in contact with an attorney who can help you navigate the legal process, and follow the correct resolution path for your business.