Small business taxes are surprisingly confusing and with many of these companies operating on narrow margins, it’s no surprise that small businesses want to save as much as they can. To that end, most small businesses make a concerted effort to organize their tax deductions to reduce what they owe – buy being overzealous with deductions can quickly get a small company in trouble.
As you review last year’s taxes and consider what you’ll owe in the coming year, beware of these 4 tax mistakes; they can get your business into serious trouble with the authorities.
Small Business Should Beware These 4 Tax Troubles
Check Employee Status
With the rise of the gig economy, more and more workers have been classified as 1099 contractors rather than W-2 employees and from a tax perspective, this makes a big difference. With W-2 employees, you have to cover payroll taxes, while with 1099 contractors, you’re not responsible for those fees.
Before you file your taxes, be sure to review your records and ensure that everyone’s employment status is listed correctly. You’ll want to be especially vigilant about this if you run a cash-heavy company, as the IRS monitors those businesses most closely for hidden income.
Beware Hidden Income
Maybe it’s not intentional. Maybe you didn’t understand some of the legal niceties and honestly thought that you didn’t have to report all those little bits of cash income.
Some tax problems are honest misunderstandings, especially in the first years, but the fact is, hiding income is illegal and the risk of hidden income is why you should work with a tax professional or local consultant, especially if you’re in an industry often exposed to “special taxes.”
In addition to being illegal, hiding income as a small business can quickly turn into money laundering as a business grows. Money laundering is a form of securities fraud and can leave you open both to traditional legal action as well as potentially make you the subject of an SEC whistleblower case if an employee reports you.
Employees are legally protected if they act as whistleblowers, but such a case can be disastrous for your reputation and your business’s future.
Over-Deducting Startup Expenses
Small businesses are allowed to deduct a wide variety of expenses, and in the first year, it’s not even expected that these businesses will make a profit. That’s just a fact of doing business, but that doesn’t mean you can take excessive deductions. Business is only allowed to deduct $5,000 in startup costs their first year; any more than that must be amortized over 15 years.
This may not be as advantageous, but remember, you also get a $5,000 organizational deduction and a variety of other specific deductions – the key is to break them all down correctly.
Don’t Forget Fringe Benefits
Operating a small business can come with an assortment of minor benefits, things which can be hard to calculate but that add up all the time. These are known as fringe benefits and while some of them aren’t taxable, many of them are.
When doing your taxes it’s important to account for taxable fringe benefits like vacation expenses, relocation expenses, and business-related frequent-flyer miles converted to cash.
It should be easy to identify these as they’re subject to withholding on your employees’ end, but if you miss them, the late fees and potential consequences will be enormous.
There are as many tax errors – and acts of duplicity – are there are businesses, so before you file, look everything over and consult with an expert to ensure you remain on the right side of the law. It’s the best way to avoid the IRS and set your business up to thrive going forward.