Are you paying enough in taxes? Most small business owners would say they already pay plenty. But the IRS disagrees. The agency calculates the “tax gap”—that is, what it expects to collect and what taxpayers actually fork over—at more than15 percent of total taxes due.
Personal income from business activities—rather than wages or investments—is the single greatest source of this discrepancy, according to the IRS, accounting for between $83 billion and $99 billion of missing tax dollars. That’s why the agency directs the greatest share of its enforcement budget—41 percent in 2006—toward small businesses, almost as much as it devotes to corporations, high-income individuals, and criminal activity combined.
Since the IRS already sees the bulk of small business owners—those with businesses structured as sole proprietorships, LLCs, partnerships, and S-Corps—as a greater risk of misreported income compared with individuals or large corporations, you need to be careful to avoid cutting any corners that could trip you up during an audit.
The comments above and these 4 tips are from a list of 25 Tips, provided in a Business Week article.
1. Classify workers properly
Are your workers employees or independent contractors? If you classify workers as independent contractors and don’t contribute the employer’s share of their payroll taxes, make sure they truly meet the IRS’s definition.
It has less to do with how many hours they work and more to do with how much control you exercise over them.
2. File and pay on time
It sounds obvious, but if you don’t pay your taxes or file for an extension by Apr. 15, the IRS can file a substitute return for you, collect the money from your bank accounts, or get a tax lien against your property.
3. Pay estimated taxes
Since taxes aren’t withheld from your business income as they are from W-2 wages, you have to pay the IRS estimated taxes four times a year. While some business owners may not owe estimated taxes—sole proprietors who expect to owe less than $1,000 for the year, for example—failing to pay them could leave you on the hook for a penalty come April.
4. Keep careful records
Don’t stuff all your receipts and invoices in a desk drawer. Make sure you have records to back up your sources of income and expenses. The burden is on the taxpayer to prove a deduction is a legitimate business expense, so you should have receipts to show an auditor that your write-offs are above board.
Information on Accounting, Taxes and Risk Management is available in a SCORE Chicago workshop on July 17th. Registration information is at: http://bit.ly/AccountingRisk
Special thanks to Irv Williamson, who will be presenting this workshop.