Paying Uncle Sam can be a complicated matter, especially if you’re running a small business. This opens the possibility of making mistakes, and you can bet the Internal Revenue Service will catch some mishaps.
Resolving tax issues can be a lengthy, burdensome process that negatively impacts your ability to do business. Here are five small business tax mistakes you should be aware of (and avoid).
1. Forgetting what (and who) you need to pay
The IRS isn’t the only agency you’ll have to pay during the tax season. For one thing, you’re going to have to pay sales taxes, payroll taxes, property taxes, local taxes, excise taxes and self-employment taxes, among others. Depending on where you operate and the type of business you’re running, you may pay different taxes than a competitor in another state. For example, in New Jersey, motor fuel retailers have to pay the N.J. Department of the Treasury a tax on all the fuel they sell.
Self-employment taxes are easy to forget about as well. American Express spoke with Janet Lee Krochman, a Certified Public Accountant who noted that, for non-corporate businesses, the amount of self-employment taxes you need to pay may double the impact they have on your business if you fail to pay.
2. Neglecting to deduct startup costs
If your business is new, and technically a “startup,” be sure to deduct the costs associated with the organization from your taxes. However, don’t get carried away, CPA Gail Rosen told QuickBooks that many organizations assume they can deduct all of their expenses, when in reality, this isn’t the case.
So, what qualifies as startup costs? The IRS designates all of the expenses you incur before your first sale to be startup costs. So, all those computers, desks and chairs you bought are deductible. Also, be aware that you can only deduct these costs over the course of 15 years. If your total startup costs were $50,000 or less, you can deduct $5,000 for property and equipment and another $5,000 for the trouble of setting up your business from a legal standpoint.
3. Classifying employees as contractors
It’s possible you may regard some employees as contractors. They specialize in particular skills and provide their services whenever you need them. However, the IRS may not agree with you in regard to your designation and you can be held liable for employment taxes for that employee. NerdWallet spoke with Guy Baker, a certified financial planner at Wealth Team Solutions in California, who noted the IRS’ classification depends on several factors including the following:
Whether you have control over how many hours the contractor in question works.
The type of work the contractor performs.
If the work the contractor specializes in is a core component of your business.
“How many organizations does the person work for?” posited Baker. “If you are the only one and they get 100 percent of their income from you, it is likely they are an employee.”
Think of it this way, if you run an HVAC installation and maintenance business, and hire an electrician periodically to fix specific problems that are more part of specialty services, it’s likely the IRS would consider that electrician a contractor. But if you pay that electrician to stay on call and your business is responsible for a large majority of his income, regardless of the fact that he may have other clients, the IRS may consider that electrician an employee of your business. If your business reimburses the electrician for his materials and expenses or provides the tools and materials necessary to complete the job, it is even more likely that the IRS will consider that electrician an employee.
4. You try to handle your payroll in-house
The idea of handling taxes and payroll on your own may have its appeal, especially if you’re one who likes to be in control, but doing so can put you at risk of making general mistakes. American Express noted that even if you file payroll payments just a day late or pay the incorrect amount, you’ll have to pay quite a few fees.
“It doesn’t take long for a new business to go belly up because payroll taxes were not properly paid,” said Jessie Seaman, a licensed tax professional, in an interview with American Express. “Even if you choose a corporate structure or LLC for the personal liability protection, this is not a blanket safety net; the IRS can hold officers liable for nonpayment of payroll taxes.”
Once the IRS determines that an officer is liable for nonpayment of payroll taxes, it can immediately begin collection action, such as federal tax liens and bank levies, against the officer’s personal assets.
5. Skipping out on maximizing your medical reimbursement plan
Have a spouse? Is he or she working with you? If you claim her as an employee, Lawrence Danny, a CPA and former IRS agent, told QuickBooks that you could benefit from a medical expense deduction through the Medical Expense Reimbursement Plan. What this program does is allow you to pay for your employee spouse’s medical expenses that aren’t covered by insurance without paying taxes on those plans.
Plus, if your spouse is considered an employee at your organization, you can also deduct your uninsured medical expenses (as well as those of your kids, if you have them) through MERP.
All in all, make sure you pay close attention to what you owe local, state and federal authorities.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Amy M. Van Fossen, at 201-806-3364.
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5 Small Business Tax Mistakes To Be Aware of & Avoid
Author: Scarinci Hollenbeck, LLC
Avoid these 5 small business tax mistakes
Paying Uncle Sam can be a complicated matter, especially if you’re running a small business. This opens the possibility of making mistakes, and you can bet the Internal Revenue Service will catch some mishaps.
Resolving tax issues can be a lengthy, burdensome process that negatively impacts your ability to do business. Here are five small business tax mistakes you should be aware of (and avoid).
1. Forgetting what (and who) you need to pay
The IRS isn’t the only agency you’ll have to pay during the tax season. For one thing, you’re going to have to pay sales taxes, payroll taxes, property taxes, local taxes, excise taxes and self-employment taxes, among others. Depending on where you operate and the type of business you’re running, you may pay different taxes than a competitor in another state. For example, in New Jersey, motor fuel retailers have to pay the N.J. Department of the Treasury a tax on all the fuel they sell.
Self-employment taxes are easy to forget about as well. American Express spoke with Janet Lee Krochman, a Certified Public Accountant who noted that, for non-corporate businesses, the amount of self-employment taxes you need to pay may double the impact they have on your business if you fail to pay.
2. Neglecting to deduct startup costs
If your business is new, and technically a “startup,” be sure to deduct the costs associated with the organization from your taxes. However, don’t get carried away, CPA Gail Rosen told QuickBooks that many organizations assume they can deduct all of their expenses, when in reality, this isn’t the case.
So, what qualifies as startup costs? The IRS designates all of the expenses you incur before your first sale to be startup costs. So, all those computers, desks and chairs you bought are deductible. Also, be aware that you can only deduct these costs over the course of 15 years. If your total startup costs were $50,000 or less, you can deduct $5,000 for property and equipment and another $5,000 for the trouble of setting up your business from a legal standpoint.
3. Classifying employees as contractors
It’s possible you may regard some employees as contractors. They specialize in particular skills and provide their services whenever you need them. However, the IRS may not agree with you in regard to your designation and you can be held liable for employment taxes for that employee. NerdWallet spoke with Guy Baker, a certified financial planner at Wealth Team Solutions in California, who noted the IRS’ classification depends on several factors including the following:
Whether you have control over how many hours the contractor in question works.
The type of work the contractor performs.
If the work the contractor specializes in is a core component of your business.
“How many organizations does the person work for?” posited Baker. “If you are the only one and they get 100 percent of their income from you, it is likely they are an employee.”
Think of it this way, if you run an HVAC installation and maintenance business, and hire an electrician periodically to fix specific problems that are more part of specialty services, it’s likely the IRS would consider that electrician a contractor. But if you pay that electrician to stay on call and your business is responsible for a large majority of his income, regardless of the fact that he may have other clients, the IRS may consider that electrician an employee of your business. If your business reimburses the electrician for his materials and expenses or provides the tools and materials necessary to complete the job, it is even more likely that the IRS will consider that electrician an employee.
4. You try to handle your payroll in-house
The idea of handling taxes and payroll on your own may have its appeal, especially if you’re one who likes to be in control, but doing so can put you at risk of making general mistakes. American Express noted that even if you file payroll payments just a day late or pay the incorrect amount, you’ll have to pay quite a few fees.
“It doesn’t take long for a new business to go belly up because payroll taxes were not properly paid,” said Jessie Seaman, a licensed tax professional, in an interview with American Express. “Even if you choose a corporate structure or LLC for the personal liability protection, this is not a blanket safety net; the IRS can hold officers liable for nonpayment of payroll taxes.”
Once the IRS determines that an officer is liable for nonpayment of payroll taxes, it can immediately begin collection action, such as federal tax liens and bank levies, against the officer’s personal assets.
5. Skipping out on maximizing your medical reimbursement plan
Have a spouse? Is he or she working with you? If you claim her as an employee, Lawrence Danny, a CPA and former IRS agent, told QuickBooks that you could benefit from a medical expense deduction through the Medical Expense Reimbursement Plan. What this program does is allow you to pay for your employee spouse’s medical expenses that aren’t covered by insurance without paying taxes on those plans.
Plus, if your spouse is considered an employee at your organization, you can also deduct your uninsured medical expenses (as well as those of your kids, if you have them) through MERP.
All in all, make sure you pay close attention to what you owe local, state and federal authorities.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Amy M. Van Fossen, at 201-806-3364.
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