Did you realize there are over 27 million small businesses in the United States? Taking a small business from startup to success story is much harder than you may think.
As your business starts to make more money, the tax obligations you have each year will start to increase as well. While most business owners understand the value of outsourcing their payroll or HR functions, many fail to realize how important hiring a professional tax preparer is.
If you are insistent on doing your own taxes, you need to be mindful of the most common business tax penalties. Each year, businesses have to pay large sums of money due to simple tax preparer penalties.
The following are some of the most common business tax penalties and what can be done to avoid them.
1. Tax Preparer Penalties For Late Filing Can Be Expensive
One of the biggest misconceptions business owners have about tax filing is that April 15th is their deadline to get these documents to the IRS. In reality, businesses classified as S corporations or partnerships only have until March 15th to file their taxes.
If you are late with this filing, you will be charged a 5 percent penalty on the total amount of taxes you owe for the year. This penalty will be charged monthly until you have filed your taxes.
Instead of dealing with the stress of filing a late tax return, you need to get confirmation on IRS due dates. With the help of an accountant, you can get your taxes filed in a timely manner.
2. The Estimated Tax Penalty
Underpaying on your business income taxes also comes with a rather stiff penalty. This penalty is calculated based on the interest rate the IRS is charging at that particular moment. This rate can fluctuate quarterly, so there is no way of determining exactly what it will be in any given year.
The best way to avoid this problem is by checking and rechecking all of your tax estimates. It is better to overestimate what your taxes are rather than underestimating. As time goes by, you will become more comfortable with figuring out yearly estimated taxes.
3. Avoid Employee W-2 Mistakes
Each of the employees you have on your payroll will need to receive a W-2 from you each year. This document details how much money the employee has made and how much tax you have withheld from this pay. If you fail to supply an employee with this document or make a mistake on their W-2, the IRS will penalize you.
If you are late filing all of your employee W-2s, it will generally result in a penalty of $50. Staying organized throughout the year can help you avoid mistakes with these important tax documents.
Accurately marking your calendar is essential. You need to make sure that all of your W-2s have been filed no later than January 31st to avoid a penalty charge.
4. Independent Contractors Much Receive a 1099
Some business owners think that just because they use contract employees they don’t have to file tax documents on what they have paid them. The reality is that these employees are to be supplied with a 1099 form detailing what you paid them.
The only exception to this rule are contractors that earned less than $600 from you in a year. The longer you wait to file these documents with the IRS, the higher the penalty will ultimately be.
If you simply don’t have the time or experience to handle your own tax filing, working with professionals is your best bet. The money you pay to these professionals will pale in comparison to what you will pay in tax penalties by doing this important job alone.
5. Providing Inaccurate Financial Information Can Be Costly
Your main goals when filing taxes for your small business is to be accurate when it comes to your income and expenses. If your tax underpayment is deemed substantial, it could result in a 20 percent penalty being tacked on to your tax balance.
The only way to avoid this problem is by keeping accurate books and educating yourself regarding business tax obligations. For more information on business taxes and penalties, be sure to check out this post from Precision Tax.
You can also seek out some advice from experienced tax preparation professionals if you are confused about what needs to be reported. With their guidance, you can avoid headaches caused by audits or tax penalties.
6. Beware of Tax Fraud Penalties
One of the harshest penalties the IRS gives out is for suspected tax fraud. If the IRS suspects that a business has under-reported their income with the intent to commit fraud, they can levy a penalty of 75 percent of the underpayment against the business in question.
Often times, business owners who are charged with this penalty are aware of what they have done. Instead of trying to cut corners or be untruthful with the IRS, you need to provide accurate and factual tax returns.
Saving a few dollars on taxes is not work the risk of jail time. The simplest way to avoid this serious penalty is by being honest.
7. Trust Fund Recovery Penalty
Withholding and pay trust fund taxes for each of your employees is also something you need to pay attention to. These withholdings are to be sent to the IRS on a monthly basis.
Making the mistake of not withholding this tax from an employee’s paycheck can cost you a lot of money. If you are unsure about how much you need to be withholding, speaking with an accountant is a good idea. These professionals should have no problem providing you with the information you need.
Avoid DIY Business Tax Preparation
Avoiding the tax preparer penalties mentioned above is easy when leaving this job to the professionals. Researching the various accountants in your area will help you make the right hire with ease.
Are you looking for more business tax advice? If so, check out our article on little-known business tax saving tips.