Running a business is exciting, but it’s also fraught with risk. One small mistake on your business tax return could mean underpayment, penalties, and a potential criminal investigation. Even worse, you could overpay when you need operating capital the most.
An easy way to avoid common business tax mistakes is by outsourcing HR, tax, and payroll responsibilities to a Professional Employer Organization (PEO) like Resourcing Edge. This is a well-established way for industries of all types and sizes to save money, improve compliance, and optimize the administration of everything from payroll and taxes to hiring and benefits.
Learn about the nine most common tax mistakes made by growing businesses and how you can avoid them.
- Not separating your business and personal finances
One of the first things you should do when you start a new venture is to formalize your business entity through incorporation. This action transforms your sole proprietorship (or partnership) into a company, which means your business will be considered a separate taxpaying entity. The three main reasons for incorporating are: taxes, liability, and increased credibility with your customers.
When you incorporate your business, the company becomes its own legal entity, separate from the individual(s) who founded the business. This protects your personal assets from being used to satisfy debts and liabilities associated with the business. There are three options for incorporating: C Corporation, S Corporation, or Limited Liability Company (LLC).
No matter if you incorporate or not, it’s important to separate your business finances so that you can prove your business expenses and income in the event of an audit. Never mix up your personal expenses, such as medical bills, entertainment, and groceries, with your business. Mixing personal and business expenses will cause lots of confusion when it comes time to do you taxes. Simplify things by having a separate credit card for business expenses and don’t make the mistake of using it for personal matters.
- Misunderstanding payroll and employer taxes
When you have employees, you are responsible for certain employment tax responsibilities. Federal and state payroll taxes can be broken down into withholding amounts and employer-paid taxes.
Withholding taxes are taxes that are withheld from the employee’s wages for income tax, Social Security, and Medicare. These amounts are deducted during each payroll and remitted to the proper tax authority. The specific schedule you follow, monthly or semi-weekly, depends on a variety of factors. You’ll need to check the IRS guidelines or speak with a tax professional to know which schedule applies to your business.
Employer-paid taxes, such as federal unemployment tax (FUTA) and state unemployment insurance (SUTA) are taxes that are paid by the employer. Employers are required to contribute a matching amount of Social Security and Medicare tax, the same amount that is deducted from the employee’s paycheck. You may also have to pay excise taxes, state income taxes, and disability insurance taxes. You can find more tax information about specific industries on the Industries/Professions IRS web page.
If you make a mistake with your payroll and employer taxes, the IRS may issue fines, perform audits, and in some cases, instigate criminal investigations.
Payroll and employer taxes are complicated and penalties can quickly add up, which is why it’s a good idea to partner with a PEO to take care of all these taxes for you. A PEO will set up your federal, state, and local tax withholding and make sure your business is registered correctly. Outsourcing your payroll services to a PEO ensures all paperwork and calculations are done correctly and on time.
- Misclassifying workers
There’s a big difference between employees and independent contractors. If you misclassify employees and independent contractors, you may be subject to fines and penalties. Learn how to avoid misclassifying your workers.
- Not taking advantage of tax breaks
There are a number of business expenses that you can deduct, including office space, travel, and any ordinary and necessary expenses related to the business. It’s important to speak with a tax professional to find out what you can and cannot deduct. Tax write-offs may seem like a quick and easy way to lower your taxes, but it’s also really easy to make a mistake. For instance, business-related meals and entertainment aren’t fully deductible, unless there’s a specific exception.
Make sure you maintain accurate records of any business expenses you plan to deduct, including the dates, times, and descriptions of the expense. Your deductions and credits need to match your records.
- Math and spelling mistakes
Basic math and spelling mistakes can make trouble with the IRS. One missing number or letter can mean lots of lost money or potentially an audit from the IRS. That’s why it’s important to consult with a tax professional and double check the numbers and names on the return.
- Underreporting business income
Misreporting business income is another common tax mistake. If the IRS finds that you underreported income with fraudulent intent, you could end up being fined 75% for the amount you failed to report. You may also be investigated for criminal tax fraud. It’s in your best interest to work with an experienced tax professional to avoid these potential penalties and investigations.
- Forgetting about state and local taxes
In addition to federal taxes, you also need to be aware of state and local taxes. These taxes vary significantly, so make sure you know the specific tax requirements in your area. These may include income tax, employment tax, state workers’ compensation insurance, and unemployment insurance tax.
A PEO like Resourcing Edge can help you remain compliant with your state and local tax obligations. You can also visit the U.S. Small Business Administration for more information on applicable state and local taxes.
- Not filing taxes on time
Taxes are due each year on April 15 for individuals, sole proprietors, and single-member LLCs, but you could save money and simplify the tax process by submitting quarterly taxes, also known as the “pay-as-you-go” method.
C and S Corporations must submit their taxes by March 16. Work with a tax professional so you can avoid any fines associated with late filing, which is 0.5–1% for each month you are late. If you know you will be late with filing your business taxes, make sure you file for a tax extension. You still have to estimate your taxes and send them to the IRS, but the extension will give you more time to file your taxes correctly.
- Not seeking help
There are almost 1,000 IRS tax forms and tax laws are changing all the time. Each year, tax options and deductions open and close, so it’s important to be on top of all the tax changes to remain compliant. Additionally, there are often caps on how much tax you must pay and if you go over that cap, you’ll pay more than you need to and won’t get your money back.
Work with an IRS Certified Professional Employer Organization
We understand that all of these details can be overwhelming, which is why we’re here to help. Resourcing Edge is one of the first PEOs to be IRS Certified, which means our clients have less liability and more protection.
In addition to gaining the CPEO designation from the IRS, Resourcing Edge has completed a rigorous process to meet the contractual, operational, and financial standards to qualify for accreditation by the Employer Services Assurance Corporation (ESAC).
As an accredited, IRS certified PEO, Resourcing Edge takes care of all your employer and payroll taxes for you. You can relax knowing that paychecks and taxes will be issued on time with no mistakes.
Don’t run the risk of tax penalties and payroll mistakes. Tax audits and penalties can cause your business to close up shop. Contact Resourcing Edge today to learn more about how a PEO can help you remain complaint and avoid these common tax mistakes.