Control your tax burden: avoid these blunders
We all know the IRS is not the most forgiving group. Errors with your taxes can have costly repercussions. Learning from the mistakes of others can help you avoid the following five major blunders:
Failing to file and/or pay your taxes on time- It's tough to miss the federal and state deadlines for tax filings and payments, but sometimes life and business demands can get in the way of good intentions. It can be costly, however. If you file late, Uncle Sam typically tacks on 5% of the unpaid taxes for every month or part of the month you're late. And if you don't pay your taxes by the filing deadline, the federal penalty is 0.5% to 1% of your unpaid taxes. If circumstances prevent you from filing your tax returns on time, at least request a tax filing extension.
Underpaying estimated taxes -Those who are self-employed must estimate their federal income tax for the year and pay it in equal quarterly installments. This potentially helps you avoid a single massive tax bill in April. However, if you underpay any of your estimated quarterly taxes, the IRS may sock with you an underpayment penalty and interest. Don't forget: keep up with your quarterly tax payments.
Filing inaccuracies - Failing to keep quality records (receipts, invoices and financial statements) for filing your taxes could not only shortchange your opportunity to claim legitimate deductions, but also could incur a 20% IRS penalty if you're found to be unreasonably careless in reporting your income. This penalty typically arises in an audit, when the IRS discovers a deduction you cannot validate, or under-reported income. Instead, save all of your tax-related paperwork, and consider using a quality accounting software program - or an accounting professional - to assist you with your record-keeping.
Misclassifying employees as contractors - According to the U.S. Government Accountability Office, more than 40% of the U.S. workforce is now made up of "contingent" workers, such as part-time employees, independent contractors and on-call workers. However, businesses that try to avoid paying individual employment taxes by treating workers as independent contractors may incur penalties if the IRS disagrees with their characterization. An easy rule of thumb to determine if someone is actually a contractor: contractors substantially control their time and equipment.
Failing to obtain quality tax counsel - No matter your expertise in your particular line of business, unless you stay current with tax regulations and changes, you could be hurting yourself and your business by trying to handle your taxes yourself. By doing so, you increase the likelihood of making a costly filing mistake. Worse yet, if you get in trouble with the IRS, you'll have no one to represent you. Instead, consider hiring a qualified tax professional to not only handle your filing needs but also provide quality tax counsel year-round.
Taxes can be daunting for small businesses, but far less so if you've determined a proper tax record-keeping and filing strategy.
For more useful tips for keeping your business running smoothly, visit California Bank & Trust's Business Resource Center.