Receiving a notice from the Internal Revenue Service (IRS) can feel overwhelming. Your mind starts to worry about the business, especially while managing the pressure of tax compliance. Understanding the most common pitfalls is the first step toward protecting your bottom line and livelihood.
Misclassifying workers
If you treat a worker as a contractor but the IRS identifies them as an employee, you could be on the hook for back taxes and stiff penalties. To ensure your classifications are correct, you must weigh multiple factors across behavioral, financial and relationship categories.
Mixing business and personal expenses
Be careful when using business funds for personal expenses. The IRS can flag personal trips or home utilities, which could trigger a comprehensive audit into all your records. While some expenses can be deductible, they must be ordinary and necessary for your trade.
Instead of putting business and personal money in one account, create separate accounts for each category. If you accidentally use a personal card for a business expense or vice versa, write a check for the exact amount while keeping the receipt.
Failing to file on time
Business tax returns must be filed on time. Otherwise, you can face filing penalties and interest. The longer you delay, the more penalties and interest accrue. Avoid this by marking your calendars accurately and setting digital reminders to stay alert.
Underpaying taxes
Since you need to pay taxes quarterly, you must pay 90% of this year’s tax or 100% of last year’s tax. However, if your prior year adjusted gross income exceeded $150,000, the safe harbor requirement increases to 110%. Failing to meet these requirements can result in an interest charge on the amount you underpaid, calculated for each quarter you were short.
Taking tax compliance a step further
While you know your business best, seeking legal advice can help you understand the nuances of the law. Should you encounter issues with the IRS, an attorney can provide tailored guidance on addressing the matter while protecting your taxpayer rights.