Small businesses’ most common tax issues are simple mistakes that result in inadvertent noncompliance. These are mistakes made by small business owners or their hired tax preparers due to a lack of training or knowledge about tax laws.
Business owners should not assume that the IRS will overlook these mistakes or that a small business tax professional might also be able to find and correct these mistakes. In a slight twist of irony, the IRS has to assume that all misfiled or unpaid taxes are inadvertent noncompliance. It is the IRS’ job to find the true tax liability and make business owners pay any back taxes that are due, regardless of the cause of the issue.
Today, let’s take a closer look at other common tax issues that small businesses face. Here’s what you need to know:
Incorrect Deduction Amounts
Incorrect deduction amounts result from the business owner’s failure to account for expenses properly. For example, expenses are often misclassified as business expenses, even though they are personal expenses. For example, the owners of a small business may drive their vehicles for both personal and business purposes. If the business owners were to claim IRS per-mile-rate deductions for their vehicle use, then the IRS would view the use of their vehicles as a personal expense, not a business expense.
Erroneous Tax Withholdings
Erroneous tax withholdings occur when a business owner overestimates the amount of taxes withheld on a payment. This can occur, for example, when a business owner collects cash payments and doesn’t remit them to the IRS until some time later. These funds are considered to be income to the business owner. The business owner must pay these funds to the IRS by the applicable due date, even if the funds are not from a business source. If the business owner does not pay these funds on time, they face penalties and interest on the unpaid taxes.
Misclassification of Employees
Mistaking employees for independent contractors is a common tax mistake that many small businesses make because they don’t understand the IRS rules on whether an individual is an employee, a contractor, or both. Simply calling someone, an independent contractor will not suffice.
The IRS has a 20-factor test to determine whether an individual is an employee, a contractor, or both. In general, the IRS will classify an individual as an employee if the individual is subject to the employer’s control, performs services for the employer for an identified period of time, receives a W-2 Form, and does not direct the means and manner in which the services are provided.
Failure to File Tax Returns
Failing to file tax returns or pay taxes is, of course, the worst small business tax mistake to make. Small business owners must be aware that they have a filing obligation to the IRS and a tax-payment obligation to their state. This can be an expensive mistake.
In addition, the IRS is getting better at finding these matters. The reason is that the IRS has different computer software that can identify small businesses liable for taxes but have not filed tax returns. If the IRS determines a business, it may receive a letter requesting that they file outstanding returns.
The Bottom Line
Small business owners should not assume that the IRS will overlook these mistakes or that a small business tax professional might also be able to find and correct these mistakes. If a business owner makes one of these mistakes, they must fix it quickly. Otherwise, the IRS will do so.
Axiom Tax Resolution Group is a company that offers the help of tax relief services and specialists. We understand how complicated it can be to deal with all the processes involved in sorting out your taxes. That is why our primary goal is to provide you with permanent solutions to your tax problems. Contact us today to learn more!