Starting a new business can be intimidating, but extremely rewarding. However, many entrepreneurs are focused on so many different things that they overlook some simple steps that can save them money when it comes time to pay Uncle Sam on April 15.
Jessie Seaman is a licensed tax professional with the Tax Defense Network (taxdefensenetwork.com), which provides financial advice and tax resolution services around the country. Here are some of her tips regarding the biggest tax mistakes entrepreneurs make:
1. Employee vs. subcontractor: When a business pays individuals for work done for the benefit of the business, they are either paid 1099 or W-2. Employers sometimes have a difficult time determining whether to categorize the worker as an independent contractor or as an employee that should be on payroll. If the IRS determines the worker is an employee rather than a contractor, costly penalties are assessed and a large tax bill will result due to unpaid Social Security and Medicare.
2. Commingling: Keeping business income and expenses in a separate account from personal income and expenses is key. The business bank statements should be solely used for business expenses, and no personal charges or withdrawals should occur. If business and personal funds are commingled, the owner/shareholders/members could find themselves personally on the hook for business tax debts.
3. Payroll: Paying employees can be very complicated and takes a significant amount of time to do if you are not a professional in the field. Each employee must complete a W-4 for federal withholding, the employer must match the employees SS/Medicare payments and this money must be deposited weekly, monthly, or quarterly with the IRS. If the deposits are made one day late or are for an incorrect amount, hefty penalties are assessed. Unemployment returns must be paid, and states and localities that have income tax also require regular deposits and filings. W-2s/W-3 forms must be filed with the SSA annually too.
4. Accounting: Many business owners do an annual accounting to prepare their tax return, but how does the business know how much money it is making throughout the year? A profit and loss statement should be updated every month so the business can easily see where money is coming in and where money is bleeding out of. In order to maximize profit, a business owner needs to have a clear idea of how the revenue is being spent and what can be cut back.
The Tax Defense Network’s team of licensed tax professionals, enrolled agents, and CPAs has resolved over $120 million in tax debt. The Tax Defense Network is A+ rated by the Better Business Bureau.