Many people make the choice to go out on their own and start a business. However, many of these business owners are not familiar with the tax implications of making this choice and find themselves in hot-water with the IRS. Here are a few tips for making sure that your business does not end up owing back-taxes.
1. Take the time to educate yourself about your tax obligations. Although learning about taxes is not the most glamourous part of opening a business, it is an essential step to ensuring your business’ success. You need to know if you determine if you are responsible for quarterly estimates, payroll taxes, sales taxes, fuel taxes, and/or personal property taxes. Claiming a lack of knowledge is not going to get you off the hook for these taxes and the interest and penalties for not paying them is steep.
2. Treat your business like a business, not your personal piggy bank. Your business is its own entity and needs to be treated as such. It should have its own separate bank account and you should run all of your business income and expenses through that account. Just like your employee would not have access to pay their mortgage or go on vacation from your business account, you should not either. Aside from other issues with comingling personal and business money, keeping things separate will allow you to keep track of your business financials.
3. Keep up to date books and records. Many taxpayers just throw all of their business receipts into a pile and organize and add them up at the end of the year. However, if you keep track of your income and expenses throughout the year, you will know what your business income is at all times and can adjust your tax payments accordingly. For taxpayers having a good financial year, they will need to increase the amount of their estimated tax payments or run additional payroll so they do not have a tax liability at the end of the year. For taxpayers having a bad year, they will want to decrease the amount of their quarterly estimates or payroll so they do not overpay on their taxes.
4. Hire a payroll company, bookkeeper, and/or tax professional. If you are not familiar with taxes, or if you do not have the time to keep proper track of your books and records, hire someone that does. If you are running payroll for employees, use a payroll company. Although many small businesses do not want the extra expense, these services will pay for themselves by keeping you out of tax trouble. Falling behind on your tax obligations, filing late returns, or making improper tax deposits can lead to huge tax balances and very expensive interest and penalties adding to the balances. Staffing the correct people to handle these obligations will not only help to ensure that your tax obligations are met, but it will also provide you with better financial knowledge of your business. Just remember, even if you have someone else preparing your returns and making your deposits, you are still ultimately responsible for making sure that all items are getting done timely.
5. Treat your taxes as a priority. Most small businesses have cashflow issues from time to time. During these times, it is often easier to choose not to send in your tax payment over not paying something more immediate, such as an electric bill. However, prioritizing other bills over your taxes is never a good idea and can lead to a large tax balance at the end of the year that will continue to grow with interest and penalties.
Owing back-taxes can cause a huge financial burden on your business. It may lead to the IRS issuing liens against your business property or levies against vendor payments and bank accounts. Some businesses are forced to close down when they are unable to pay their back-tax balances. As a business owner it is essential that you educate yourself on your tax responsibilities and take steps to make sure that you are meeting your tax obligations.
- Austin & Larson Tax Resolution