The average owner of a Small Business typically reports a loss in their first year of operation. But when the IRS steps in, many first-timers don’t even stand a chance. It’s important to stay one step ahead of the game when it comes to obeying Tax Laws. Small Business owners need to make sure they avoid the common problems Small Businesses run into with the IRS.
Failing to withhold payroll taxes is the fast track to trouble with the IRS. The penalty for this equals the amount of the taxes that are owed. It’s called the 100% Payroll Penalty or “Trust Fund Recovery.” The results of this mishap can be devastating for any Small Business regardless of how successful they are.
It’s a little tricky, but it’s important to properly classify your Small Business workers. The two classifications are “Employees” and “Independent Contractors.” If Employees are misclassified as Independent Contractors, they would avoid Tax Reporting. This is the same as stealing from the IRS, and the punishments imposed for this are not light. Form 22-8 "Determination of Employee Work Status for Purposes of Federal Income Tax Withholding" will help you determine the important differences between an “Employee” and an “Independent Contractor.”
Knowing and taking advantage of Tax Credits is important if you want your Small Business to survive and thrive. But you can only deduct the cost of items you use for work. This means no deducting expensive vacations, limo rides, or new editions to your house. The deductions you claim must be reasonable and responsible. Additionally, you have to be ready to prove the deducted items are used for work. If a taxpayer is caught making false deductions, they will owe IRS Tax Debt plus penalties and interest. Do not get greedy when it comes to the IRS.
With proper planning and understanding, you can beat the IRS and avoid the Common Problems Small Businesses Encounter. Don’t forget that although there are many issues that come with owning a small business, there are also a few advantages. Don’t overlook valuable Tax Credits. Practically everything purchased that goes towards operating your business is Tax Deductible. This means everything from pens and notepads to ovens, delivery trucks, computers, and more.