Too many times pride stands in the way of folks asking for help. But if you are a small business, asking for help is the only way to stay above the fray. One area that business owners tend to run from is tax preparation.
Whether the business is fledgling or experienced, tax preparation is always dreaded. It is a necessary evil that cannot be avoided under any circumstance.
Here's a snapshot of the tax issues that can arise and detrimentally affect a business:
While it is common in a small business to wear multiple hats, preparing the taxes is not recommended unless the owner has been specifically trained. We highly recommend an accountant or certified public accountant maintain responsibility for the annual taxes and the quarterly tax filings as well. They are usually well versed in deductions that are specific to your business area.
Most business owners do not possess the expertise or time to consistently stay abreast of the changing tax laws and to unearth the many deductions that may be applicable to a business. The money spent on a true professional will be well worth it.
Pay what's due
Rather than expecting to receive a large refund from the Internal Revenue Service, plan to pay what is due.
When Uncle Sam holds your money for whatever the time period, the business owner and/or taxpayer forgoes the use of the funds and any related interest that could have been earned if the funds had been in their possession. Discuss this strategy with your tax professional so that penalties are not assessed for any underpayments when necessary.
Under no circumstances should a business owner use the employee withholdings to cover business shortfalls. This is an absolute recipe for disaster. The business owner can become personally liable for these payments as well as incur substantial penalties. Borrowing or pinching off of the withholdings will only dig the owner into a deeper hole.
The effects of the business owner using the withholdings and not paying child support payments as deducted can have an even more detrimental effect on the employee resulting in increased arrearages, suspended licenses or even jail time. Withholdings are off limits and there are no exceptions.
If the business is a corporation, it is subject to double taxation. There is a tax on the corporate level and another tax when a dividend is declared. Some small businesses avoid the dividend by simply adjusting the salary from year to year of the senior executives based on earnings.
One year the president may earn $50,000 but the next year the salary may be $150,000. The increase in salary must be justified or the Internal Revenue Service may disallow the payment as unreasonable compensation and an avoidance of corporate taxes. Be cautious and discuss the best treatment with the tax professional.
All employees are not independent contractors and cannot be categorized as such as a means of avoiding taxes and withholdings. An independent contractor provides goods or services to another entity under terms specified in a contract or within a verbal agreement.
There are tax ramifications based on the classification. Employers share in the cost of Social Security and Medicare taxes with an employee. However, independent contractors are primarily responsible for their own withholdings, quarterly tax payments, etc. Additionally, they typically fund their own benefit packages.
Differentiating between an employee and an independent contractor is typically based on evaluation of various factors with various degrees of importance, which fall into three general categories: control (does the employer control the work performed), organization (the degree to which the worker is integrated into the business) and economic realities (whether the worker benefits from his or her own labor).
Separation of powers
For checks and balances, the check writer/signer should not be the person that also balances the checkbook or performs the accounting. Too many businesses have gone under due to embezzlement. The function of writing checks and accounting for the checks should be separated at all times.
No matter how long the business owner has known the check writer, understand that temptation is great and many have been fooled for years. Avoid the temptation and separate the functions.