By Mayumi Young, CPA Founder and Managing Partner
CPA MOMS, LLP.
http://www.cpa-moms.com
877-CPA-MOMS
It’s that time of year again when the tax man comes a callin’!
For most entrepreneurs, preparing for tax season usually stimulates feelings of discomfort for those who have waited until now to prepare their books for this year’s taxes, or failed to plan for their looming tax liability. If bookkeeping backs up and starts to compound, some owners can find themselves in a pickle when they have not filed their taxes for 1 to 3 years or more.
If this is you, do not feel alone.
As business accounting experts, we find that more often than not, small business owners have not done proper tax planning, have not kept up with the bookkeeping, and pay a heavy price to have their Tax CPA do their books for the year (Side note: Tax CPAs generally don’t like bookkeeping, and aren’t generally that good at it, so they’ll charge more for the hassle than a good bookkeeper.)
This article will educate entrepreneurs on 7 common mistakes to help avoid tax pitfalls in the future. Also, you’ll learn common tax considerations to clarify the tax obligations of any business.
Please note: We are not giving tax advice, and recommend that you seek the advice of a professional that can assess your specific needs properly.
7 Common Mistakes
Before you read any further, take a deep breath and remember that there is a reason why there is an entire industry of accounting professionals. If it was straightforward, businesses wouldn’t need an accountant. Your job as business owner is NOT to learn how to implement the rules, but rather what are the rules (overall) specific to your business; and, who is the best person to assist you in properly implementing and following the rules. Hire the right professionals, hold them accountable, ask lots of questions, be proactive, review everything, and focus on growing your business.
The most common mistakes we see are:
1) Most businesses are not in the correct legal entity for optimal tax strategy. Many chose their strategy only from a legal point of view.
2) Business owners wait for the tax professional to notify you of your tax obligations. In most cases, you have to ask.
3) Entrepreneurs think that tax preparers have reviewed their books for accuracy. This is not their job and if you read your engagement letters closely, you may notice that they require you to assert to the accuracy of the numbers you are presenting.
4) Most wait until the end of the year to prepare taxes after the year is already done, and do not plan for the upcoming year.
5) Entrepreneurs do not take responsibility for their tax obligation and think that by hiring a tax professional there is nothing else to do. The responsibility and ownership of business taxes remains with the business and its owners. Tax professionals are advisors and preparers, not owners.
business tax types
1099 tax reporting rules for independent contractors
business tax types
The most common business tax types include, but are not limited to:
Income tax
Employment tax (e.g. payroll tax for corporations, self-employment tax for sole proprietors) Sales & use tax
Business property tax (e.g. taxes on your fixed assets, such as business equipment)
Property tax (e.g. commercial real estate holdings)
In the case of income tax, in most states there is a state income tax as well as a federal income tax. Some lucky states have no state income tax. Charitable organizations that are organized as a 501c(3) tax exempt status have no federal or state income tax requirements; however, 501c(3) organizations are subject to all of the remaining tax types.
This is an area that we always say…don’t mess with this. Hire a payroll service company to do this properly. Our 3rd party payroll service partners offer outstanding discounts to our community and based on that, most of our accounting professionals leverage the expertise and technology of our partner payroll service companies with their clients. Might be a clue…if accounting and tax experts don’t want to mess with payroll, you might want to take their lead. Understanding the rules between 1099 independent contractors and W2 employees is of paramount importance. If you guess wrong and claim someone is a 1099 contractor and fail to pay employment taxes, the Board of Equalization (BOE) may come knocking on your door for back taxes due.
Sales tax is assessed at the city or county level. In the age of online purchases, if a merchant fails to charge a sales tax on a purchase we make as a business owner, the city still wants their tax and expect the business owner to file and pay the sales tax as a “use tax”.
Most business owners don’t realize that they may be required to file an annual return to report and pay business property tax on business assets like furniture, fixtures and equipment. The laws vary by state, and are usually due by April 30th for assets that exceed certain values. Check your state’s county recorder’s office for more information. Real estate investors are well aware of the real estate property tax requirements.
1099 tax reporting rules for independent contractors
It is important to point out that in some cases, small business owners have tax reporting or withholding requirements, even where there is no actual tax liability associated with the business.
A good example of a tax reporting requirement is the submission of 1099/1096 issued annually. All persons and businesses are required to report certain payments made to independent contractors. These 1099 and 1096 forms essentially notify the IRS that this professional should be claiming payments received as income. This helps keep people accountable in their reporting of income. The most common, but not only reporting requiring is the 1099-MISC. If you’ve received a 1099-K, don’t be alarmed. The 1099-K is a new reporting requirement for merchants that process receipts of behalf of your company. Just make sure your gross taxable income are equal to or great than the 1099-K amounts. Better yet, hire a professional bookkeeper and make sure that all of your receipts and disbursements are recorded properly and you won’t need to worry about this.
The rules defining who should receive a 1099, how much should be reported, and by when is outlined at: http://www.irs.gov/ or you can ask a tax professional. 1099s were due on January 31st and the 1096s are due February 28th. If you missed the January deadline, there is still time to get your 1096s into the IRS.
business legal structure
We have a series of webinars that focus on this topic alone. It is a big conversation. The short version is…keep in mind that the tax rules are different depending the business legal structure (e.g. Sole Proprietors, S Corporations, single-member LLC, multi-member LLC, partnerships.) Sole proprietors and single-member LLCs (with certain tax elections) are subject to Self Employment tax in addition to income tax. This might affect your choice in legal structure. It is a great practice to have a meeting with your accountant AND your corporate attorney at the time to identify the best tax strategy and legal protection.
With all of these tax types, rules, agencies, and deadlines, it can seem overwhelming to keep track of it all. We recommend that every business owner connect with their tax professional at least once a year (if nothing significant has changed in the business) and at every major business change to identify all of the tax commitments for that business. You’ll want to literally outline the tax deadlines for the upcoming year in a calendar.
To conclude, we invite every business owner to bring some measure of clarity and awareness to their business and tax world by seeking the right professional support.
If you would like a Free Phone Consultation with one our CPA MOMS or Bookkeeper Moms to assess your specific needs, please visit us at http://www.cpa-moms.com/usgcc. As part of the US Green Chamber of Commerce community, you will also have a chance to “OPT-IN” to our free membership to receive a complimentary 3 part video series on “Demystifying the Financial Side of Your Business!”
Let 2014 be the year you achieve financial peace of mind!
By Mayumi Young, CPA Founder and Managing Partner
CPA MOMS, LLP.
877-CPA-MOMS
