Avoiding Five Small Business Tax Issues

When starting a small business, the last thing they are probably thinking about is potential small business tax problems they could run into. Why is this the case? Small business owners are navigating many complicated issues from quarterly tax payments to Economic Injury Disaster Loans. Simply put, there are a lot of details to get right—starting with a W-2 worker’s salary that must be reported to the IRS and state governments by the W-2 deadline — as well as the income and deductions business owners need to claim accurately on their own business tax returns.

Additionally, small businesses also have more complex tax responsibilities, including:

• Payroll tax deposits and filings
• Reporting payments to contractors each year
• Sales tax reporting
• State and local licensing requirements
• Quarterly tax payments

So, I thought I would mention the most common difficulties you could face: 

1. Not paying self-employment tax: New small business owners are often surprised when filing their tax return for the first time because in addition to income taxes, you owe an additional 15.3% in self-employment tax on your net self-employment income. While employees and employers share the burden of Social Security and Medicare taxes equally by paying 7.65% each, a self-employed individual must pay the full amount. On the other hand, you may be able to take advantage of multiple small business tax deductions to offset the additional tax requirements, including the home office deduction and mileage. 
    
2. Not filing quarterly estimated tax payments:  As a self-employed business owner, you don’t have taxes withheld from a paycheck like traditional W-2 employees. If you expect to have a tax liability of at least $1,000, you should send to the IRS quarterly tax payments. Not knowing or forgetting about quarterly estimated tax payments may result in significant interest and penalties.
    
3. Failing to report cash payments: Cash-based businesses require detailed bookkeeping to substantiate income and expenses. With cash-based businesses, Form 1099 can be used to substantiate income. The law states that all income should be reported, whether it is shown on a 1099 or not. Some IRS small business audits begin with gauging if a business has reported all of its income so make sure your paperwork is in order.
    
4. Over-deducting business expenses: Phones, home offices, business travel expenses, and entertainment expenses are all commonly deducted by small business owners to lower taxable income. Yet, the various IRS rules around business versus personal expenses are confusing for some, especially new entrepreneurs. The fact is that the IRS perceives many of these expenses to be personal in nature (and therefore not deductible). Because of this, detailed recordkeeping is essential. You have to prove your expenses are business related in the case of an IRS audit. Mileage is one of the first things they look at so you should seriously consider using an app-based tool like Everlance to document it.
    
5. Failing to file: Some small business owners don’t file because they simply can’t pay the tax balance due. There are major tax consequences associated with your small business not paying taxes. Not filing (or filing late) equates to interest and penalties, including a 25% failure to file penalty, which is tacked onto your overall tax bill if it is five months or more late. So,If you can’t pay your business taxes, the most important thing you can do to avoid enforced collection is to get an agreement with the IRS.
   • The IRS offers several options, including extensions (see ) to pay and payment plans.
   • Businesses in financial hardship should consider special IRS programs offering deferred payment and settlement.