Mastering Small Business Tax Compliance

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Cutting through the tax compliance clutter

Have you ever tried reading an IRS instruction form? You know the ones with three columns and tiny print that are written as dry as a desert? Unless you have the patience, time, or a degree in accounting, it’s likely you find reading these forms boring, confusing, exhausting, and frustrating.

Which makes it tough to get answers when you have a tax compliance question about your small business! 

Unlike enterprise or even mid-sized businesses, small business owners usually don’t have an army of CPAs available to them to help them ensure they’re compliant while minimizing their tax liabilities. As a result, small businesses procrastinate dealing with tax compliance because, well, it’s difficult! What’s worse, though, is that if you mess something up with the IRS, it can cost a small fortune to fix. 

As a small business owner, you probably know it’s important to be compliant, but finding all the answers can be challenging! That’s why we’ve put together this little guide to help you navigate some common small business tax compliance questions.

Understanding your tax obligations  

Before we dive into some specific obligations you may face, it’s important to understand that tax liabilities can vary great from company to company, driven by varying factors such as business structure, whether you have employees, and other situations.

Types of taxes and their deadlines

There are a few different types of taxes you need to file and potentially pay. The following chart outlines each type, their filing deadlines, and their payment deadlines.

Tax TypeDescriptionFiling DeadlinePayment deadlineIncomeTax on the income your business generated. All businesses must file these annually, except if they’re partnerships (more on that below). April 15April 15EmploymentThese are taxes you pay when you have employees. They are the employer’s portion of things like Social Security and Medicare. QuarterlySame as filing deadlineSelf-employmentThis is similar to payroll taxes in that they go towards paying for Medicare and Social Security. You may or may not have to file and pay these depending on your business structure (see below).April 15April 15SalesTaxes collected as part of the sale of a product or service. Varies by StateVaries by StateExciseThis tax applies if you manufacture certain products, such as alcohol.QuarterlySame as filing deadlineState and LocalStates and localities may also charge business taxes, including property taxes. Check with your state tax agency to see what your business may be liable for.Varies by stateVaries by state

Business structures and respective tax implications

Your business’s tax liability is also dependent on your business structure. This is something you would have chosen when you first incorporated. Following are brief descriptions of each business structure and any potential tax implications.

1. Sole Proprietorship: A sole proprietorship is a single-owner business where the owner, who often operates under their own name, is responsible for all profits, debts, and losses, and pays personal income tax on business profits.
2. Partnership: A partnership is a business structure where two or more parties share management responsibilities, profits, and liabilities, with variations in arrangements including equal sharing or limited liability, and the potential for silent partners not involved in daily operations.
3. Corporation: A C-corporation is any corporation that is taxed separately from its owners or shareholders. There are also S-corporations, which pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. In other words, those are reported on the shareholder's personal income tax returns. This allows S-corporations to avoid double taxation on the corporate income. 

Please note that these are general definitions and tax implications. The specifics can vary based on the jurisdiction and your specific circumstances. Always consult with a tax professional to understand the exact tax implications for your business.

Employee vs. independent contractor classifications

Having employees or hiring independent contractors can also have tax implications. Particularly when it comes to paying employment taxes. 

An employee is a worker who performs services under the control of a business. The business is responsible for withholding and depositing payroll taxes, as well as paying the matching employer portion of payroll taxes.

On the other hand, independent contractors are typically self-employed individuals. From a tax standpoint, businesses do not have to withhold or pay any taxes on payments to independent contractors, as they are required to file and pay those themselves. 

However, if a business misclassifies an employee as an independent contractor, it can be held liable for employment taxes for that worker. Misclassification can lead to steep penalties and back taxes. An independent contractor may be considered an employee in the eyes of the federal government if that person’s ongoing work lasts longer than a year. This is often decided on a case-by-case basis, though, so be sure to check with a tax professional for any clarification.

Stay in the clear with good recordkeeping and documentation

When it comes to tax compliance, maintaining proper records is the first step to achieving peace of mind. This includes keeping track of income statements, expense receipts, and asset logs. Income statements provide a detailed account of your earnings, while expense receipts are necessary for any deductions you plan to claim. Asset logs, on the other hand, are important for understanding the depreciation of business assets, which can also affect your tax obligations.

Having a proper organization system for these records is equally important. You might want to use both physical and digital storage solutions, though that can become cumbersome. Whatever form you choose, be sure to keep your records organized by type, date, or another relevant category can make retrieval easier when it’s time to file your taxes or if you’re audited.

Lastly, it’s important to understand the retention guidelines for different records. While the exact time frame can vary depending on the type of document and your local regulations, a general rule of thumb is to keep tax records for at least three years. However, some records may need to be kept longer, such as asset records related to property you own. Always consult with a tax professional to understand the specific guidelines applicable to your situation.

How to maximize deductions and credits

Just like you have deductions and credits for personal income taxes, there are several common deductions and credits that can significantly reduce your taxable business income. For instance, if you use part of your home exclusively for your business, you may be able to claim a home office deduction. Similarly, if you use your vehicle for business purposes, you can deduct the associated costs. Depreciation, which is the reduction in value of an asset over time, is another common business deduction. This can apply to assets such as equipment, vehicles, and buildings.

Get smart strategy for filing and paying taxes

Despite all the twists, turns, and small details you need to pay attention to, filing and paying your taxes doesn’t have to be complicated or difficult. 

You might prepare your taxes yourself, which can be a cost-effective option if your tax situation is straightforward. However, if your taxes are more complex, you might consider hiring a Certified Public Accountant (CPA) who can provide expert advice and ensure your taxes are filed correctly. Alternatively, there are many tax software suites available that can guide you through the process of preparing and filing your taxes. These programs often come with tools to help maximize deductions and credits.

It's also a good idea to set up an efficient payment system to ensure you don’t accidentally fall out of compliance. Calculate your monthly tax liability and put that aside, to ensure you always have enough to cover the expected amount. 

Finally, if you receive a notice from the IRS, it's imperative to respond quickly and provide any requested information. If you're selected for an audit, you'll need to provide documentation to support the information on your tax return. If you disagree with the IRS's findings, you have the right to appeal the decision.

Keep your company compliant

Filing and paying taxes is one of the most fundamental parts of running a business. It’s also likely one of the most challenging, yet most uninteresting, parts of running a business. 

Regardless, you need to do everything in your power to remain compliant throughout the year. While dealing with administrative tasks is likely not your idea of fun, Homebase can make it a lot easier! With apps for payroll and compliance support, Homebase is a great partner to have in your corner–during tax season and all year round! 

Plus, with the right systems in place, tracking, filing, and paying taxes doesn’t have to be difficult. In some cases, it may even be as simple as clicking a few buttons every month or so. Just remember: It’s a good idea to consult with a tax professional to ensure all your I’s are dotted and T’s are crossed. 

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