As a small business owner, it’s imperative to understand the direct impact that tax planning has on your financial health. Proper planning gives you the freedom to forge ahead confidently, knowing that your bottom line is safe. Conversely, tax preparation mistakes cost you money, time and focus on your most important objectives for your business.
Avoid making the following critical mistakes to ensure that your small business’s tax planning is strategic, compliant and a source of satisfaction instead of stress.
1) Lacking Cash On Hand
First and foremost, you must have the cash required to pay your taxes on time. Late payments generate significant additional costs. If your payments are late, you’ll incur penalties, which accrue substantial interest. And undoubtedly, the IRS will not forget about their money.
To ensure that your small business has the necessary cash to make tax payments on time, prioritize your planning and preparation. Keep a careful eye on your payroll and other cash-depleting expenses and activities year-round, not just when tax season nears.
2) Filing And Reporting With Improper Forms
As the IRS has become more technologically advanced, its expectations on the detail of your reporting have increased. Without the level of detail the IRS now expects, a dreaded audit becomes a more likely possibility. Consider implementing tax software designed for small businesses to ensure that you meet the IRS’ expectations.
In addition, if your filing is incomplete or the forms you use are not the most up-to-date versions, you’re more likely to grapple with penalties, and you may even be forced to re-file.
If you aren’t sure where to begin, consider working with a small business tax preparation expert, one who’s capable of showing you where your tax responsibilities lie and guiding you to proper documentation.
3) Not Understanding Sales Tax
Every year, small business owners apply sales tax incorrectly, largely because of nuanced tax codes that vary from state to state, and even between local municipalities. For example, the state your small business operates in determines whether you pay sales, use and/or excise tax.
Here are some quick tips to help you ensure that your tax planning covers every angle:
- Know which taxes (sales, use and excise) you’re responsible for, as well as their key differences.
- Acquire and submit the tax forms that are applicable to your specific state.
- Find out which transactions are tax-exempt and how to track them.
- Learn the diverse range of sales taxes.
4) Not Understanding Payroll Tax
Finally, understand and properly allocate your payroll taxes between federal, state and social security. Many small business owners think about this only when it comes time to file instead of doing so proactively. This causes headaches and wasted time. If you submit taxes that aren’t properly divided, your odds of penalties and re-filing increase.
For example, when you report your payroll quarterly using a 941 form, you have to understand how social security and Medicare taxes work. Record this number monthly and keep track throughout the year to make things flow better at tax time. Also, think about working with an expert consultant or bringing in software that’s designed to manage payroll tax.
To achieve sustainable success, make sure the tax planning and preparation for your small business is airtight year-round. After all, the time and money you spend correcting filing issues and paying penalties could be put toward growing your business instead.