Many small business owners are concerned about taxes. With proper business and accounting practices and a basic understanding of how the IRS audit process works, small business owners should not have to worry about filing their taxes. The following tips can help business owners avoid a tax audit and better manage their tax filings each year.
Hire the Right Accountant and Stay Involved
First, many small business owners may be highly successful in their chosen line of work, but that does not assure that they will be highly successful at accounting for their businesses. Hire an accounting professional to handle the accounts for the business - the money spent on hiring the right professional can save much more in the end. Small business owners can also let go of the stress and worry that come with filing tax statements that are based on accurate information.
Once you have hired an accountant, however, do not disengage from the numbers side of your business. Get frequent updates and ask questions when you do not understand. Unfortunately, in a few cases, accountants and other fiduciaries left to their own devices have taken advantage of the situation by embezzling from their employers. While an IRS auditor may sympathize with a business owner who discovers too late that payroll taxes or other taxes owed were not paid, the business owner will still be responsible for paying the back taxes.
Don't Use Payroll Taxes Withheld from the Employees
Along with staying engaged in the business's accounting, small business owners should follow sound business practices to avoid stress and worry. Some actions a business owner takes are guaranteed to get you into tax trouble, such as taking funds that are designated for paying employee withholding taxes and Social Security. Small business owners facing dire financial straits may justify this action as simply "borrowing" from the trust account. The law disagrees with this and the business owner may face potential criminal charges along with paying back large penalties along with the "borrowed" funds.
Don't Treat Workers as Independent Contractors When they are Employees
Another example is misclassifying employees as independent contractors. Yes, the tax cost of having employees can be a burden on any business, and business owners don't have to pay taxes and other costs for independent contractors. As a business owner, you should not unilaterally decide that all employees are independent contractors.
The IRS looks at many factors when making the determination as to whether a worker is an independent contractor or an employee. The independent contractor designation frequently is an audit issue. Failing to properly classify a worker may result in significant fines and penalties. It is simply not worth it!! If you have questions about whether your workers are employees or independent contractors, contact an experienced tax professional.
Business Expenses - Keep your Proof
Keep proper proof for your business expenses and other deductions to which you may be entitled. Not keeping the proper documentation may cost thousands of dollars in denied deductions in an audit. With proper documentation and a decent filing system, responding to any audit can be easy.
You should use your tax organizer and diary to keep track of business travel, as well as business expenses and receipts, along with notes about the purpose of the expense. Whether entertaining a potential business prospect for dinner or jetting away to seal the deal, you may be able to deduct the expenses. Talk to an experienced tax professional to determine what deductions you may be missing each year.
Uncle Sam Will Find You
Finally, if you owe taxes, but cannot afford to pay them, don't hide from the IRS. File your tax statements and pay what you can by the tax deadline. Even if you cannot pay the full amount of taxes owed, you will avoid being assessed a steep "failure to file" fine (approximately 25% of the tax due) and penalty related interest. You can run, but you can never hide from the IRS.
