In recent years, a startling trend has emerged among many small-business owners. As Accounting Today pointed out, beginning in 2013, the Internal Revenue Service sent letters to hundreds of these small-scale operators asking if they had underpaid employee taxes for the previous year. This concern doesn't impact every small business in the U.S., but it highlights the distinct lack of proper tax practices among many mom-and-pop outfits.
To ensure that taxes remain a priority, here's a handy checklist for all small businesses to follow:
1. Classify Your Employees
Perhaps the most important practice begins with classifying each of your employees. Starting December 2016, new amendments to the Fair Labor Standards Act go into effect, and that impacts both how employees are paid for overtime and thus proper taxation. Having a definitive list of standard employees and independent contractors means you'll know how to address filing taxes from the very beginning.
2. Address Estimated Taxes
According to American University's Kogod School of Business, one major issue that most small-business owners struggle with are estimated taxes. Namely, determining their tax liability, when they need to be paid (quarterly or annually) and any safe harbors that offer protection in the event of underpayment. Companies with an accountant can get a firm grasp on estimated taxes before they become problematic and plan ahead accordingly to ensure payment in full. Operations without an on-staff accountant might consider outsourcing at least some component of their tax preparation to avoid any costly filing mistakes.
3. Track Your Expenses and Finances
Through the year, your company may accrue various expenses, especially if your employees have to travel frequently. That's why it's so essential to track them as they begin to pile up. This will help you stay aware of any expenditures, and where you might be able to make cuts, while ensuring your taxes remain in order before you have to file. Some companies also take the time every few months to do a check-in of sorts, making sure finances in general are in order.
4. Find the Right Software
A large chunk of small businesses rely on bookkeeping by hand. To some degree, this strategy does work, usually if a company has under 15 employees. Any more, though, and there are simply too many numbers on the books to facilitate such a system. That's where tax software comes in handy: It's a second set of eyes and a helpful assistant in one convenient package, able to track finances and ensure proper tax filing. However, it's essential to have the right software, preferably one that allows for streamlined usage and cloud-based sharing.
5. Deduct when Possible
Despite what many small-business owners might have experienced, there are quite a few tax deductions available for savvy entrepreneurs. These include everything from office supplies and furniture to the software you've purchased and insurance premiums. Not taking these deductions means needlessly spending money, and that kind of approach can impact your ability to properly handle your group's annual taxes. Fortunately, there are resources available, including an official guide from the IRS.
As mentioned above, outsourcing is a good idea for many small businesses, as it helps to ensure you follow these and many other best practices. Plus, outsourcing is a way to address certain issues that might prove cumbersome if done on your own, like paying taxes for employees in multiple states.
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