Missing the filing deadline, not filing for an extension, and owing income taxes can be very costly for a business and could have long-range negative impacts.
Not only will the tax bill accrue interest over time, but the Internal Revenue Service (IRS) can also impose a late filing penalty of 5% of the unpaid tax per month until it eventually brings the account up to date.
Therefore, it is highly advisable to plan and stay on top of all tax deadlines; otherwise, businesses risk facing stiff fines and various other legal ramifications. Here are some tips for small business owners to ensure a smooth and successful tax season.
Be Updated On the Latest Tax Laws
Staying abreast of small business tax law changes is essential for any entrepreneur. Without the knowledge of current and incoming regulations, business owners can bring costly detriments, such as underpaying taxes or incurring penalties.
Keeping up with related laws is more than just a task of the tax season too. Rather, to suitably prepare, businesses must monitor changing legislation throughout the year. Hiring professional tax specialists or accounting resources may be beneficial if the task’s complexity surpasses business owners’ capabilities.
Even if a company pays someone else to do its taxes, an entrepreneur needs to understand what is being done on their behalf and how it will affect their company’s operations in the future.
For example, small businesses have had to contend with a broad range of changes to taxation systems in recent times, stemming mainly from the COVID-19 pandemic. Fortunately, prior to 2021, the limitation that such losses can only offset 80 percent of taxable income did not apply. This meant that many companies suffering from significant financial strain due to Covid-19 could use their losses much more readily than before.
Arrange All the Necessary Tax Paperwork
Good organization is the key to a smooth and successful tax filing process. Therefore, the best way to make sure taxes are in order is by keeping detailed records throughout the year.
This will make it easier to gather relevant documents – such as receipts or mail – and prevent any last-minute scrambling when taxes are due.
In case a business hires a tax preparer, they will need to provide the following documents and accounting resources:
- W-2s and 1099s
- Bank statements
- Receipts for expenses, such as office supplies and utility bills
- Depreciation records (if applicable)
Develop an Understanding of Qualified Credits and Deductions
Tax deductions and credits can make all the difference when filing taxes, allowing businesses to reduce their taxable income or even their tax liabilities. There are several deductions that businesses with a low net income can take advantage of, such as levies or local rates or loan repayments on a business loan.
Different tax credits work to reduce the amount of taxes owed, depending on where the business is located and what type of activities it carries out.
Beyond the basics like credit for research activities or hiring certain classes of employees, savvy business owners may find they’re eligible for other credits they had yet to hear of, such as those related to using biodiesel or providing employee benefits like childcare.
As these are significant expenses and can impact profitability, it pays to check that none have been overlooked, so proper advantage can be taken during the tax season.
Calculating the Upcoming Payroll Tax Burden
Payroll taxes are an important consideration for all businesses, large or small. Employers must remain compliant with the necessary regulations by calculating and remitting these taxes regularly throughout the year.
Furthermore, those with employees must file quarterly reports, as any missed deposits can lead to costly penalties. It’s essential for companies to stay on top of payroll tax requirements to remain within the confines of the law and keep the business running smoothly.
Otherwise, they may face hefty penalties or fines due to inaccurate or untimely filing. Planning ahead can ensure that businesses are compliant with local laws in addition to time constraints.
For instance, if payments are 1-5 days late, a 2% penalty will apply; if payments are 6-15 days late, then the penalty grows to 5%. Delaying payment of these taxes beyond this period may result in even greater penalties and possibly legal repercussions.
With the right preparation and knowledge, tax season doesn’t have to create further stress and disruption for small business owners.
By understanding accounting and knowing what to expect, small business owners can make sure they are ready to take on taxes without any issues. However, they must remember important deadlines, review income and expenses throughout the year, gather necessary documents for filing, and speak with a financial advisor to gain accounting tips.
Ultimately, preparing properly upfront will make it easier for entrepreneurs to keep up with their filing obligations, so they can focus on their businesses instead of worrying about taxes.