Costly Tax Errors for Owners of Small Businesses by Cherry Laufenberg, CPA
For many small business owners, taxes are a once-a-year chore that requires them to dig through files of paper and pull together all of the documents required by their tax preparers to file their annual returns. Truth be told, maintaining tax compliance and minimizing one’s annual tax bill is a year-round process that demands constant planning and attention to detail. Last-minute preparation during tax season increases the likelihood that errors will occur and penalties will be assessed. Following are four cost-saving tips for business owners to keep in mind throughout the year.
Pay Estimated Taxes
Under the U.S.’s pay-as-you-earn system of taxation, individuals, including sole proprietors, partners, and S corporation shareholders who expect a federal income tax bill of $1,000 or more are required to make estimated payments to the government on a quarterly basis (April, June, September and January) or risk penalties that come with underpayments. The amount of estimated taxes you should pay each quarter is determined by your filing status and the income you reported in the previous year, less eligible deductions and credits.
Deposit Employment Taxes
Small-business owners are responsible for paying the wages of W-2 employees and withholding from workers’ pay the appropriate amount of federal income tax, Social Security and Medicare tax, and Federal Unemployment Tax (FUTA) based on the IRS’s withholding tables. The taxes withheld plus the employer’s share of those amounts are required to be deposited by the business on time via electronic fund transfers.
File On Time
Businesses, like individual taxpayers, must file their federal tax returns in a timely manner by the published due date, which varies depending on the entity structure. In general, S corporations and partnerships have a tax filing deadline of March 15, whereas corporate tax returns are due on April 15. All businesses can receive a six-month extension to file their returns, but tax liabilities are due by the March and April deadlines. Business owners have additional tax filing responsibilities throughout the year, including, but not limited to mailing W-2 forms to employees and Form 1099 to independent contracts and the IRS. Failure to meet a filing deadline may result in late-filing penalties and interest on underpayments.
Separate Business and Personal Expenses
The tax laws for individuals differ from those that apply to business entities. While it may be easy to use one credit card or bank account for all expenses, doing so can make it difficult to discern legitimate business costs from personal ones come tax time. This can result in errors when claiming deductions and raise red flags in the event of an IRS audit.
About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
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