5 small business tax issues — and how to avoid them
4 min read
March 24, 2021 • Block Advisors
When people choose to become their own boss, they may not be thinking of potential small business tax problems they could run into.
Because of extra tax responsibilities, small businesses may experience more interaction with the IRS and state Departments of Revenue and worry about business return audits.
Why is this the case? Small business owners are navigating many complicated issues from quarterly tax payments to Economic Injury Disaster Loans. Simply put, there are a lot of details to get right—starting with a W-2 worker’s salary that must be reported to the IRS and state governments by the W-2 deadline—as well as the income and deductions business owners need to claim accurately on their own business tax returns.
Additionally, small businesses also have more complex tax responsibilities, including:
- Quarterly tax payments
- Payroll tax deposits and filings
- Reporting payments to contractors each year
- Sales tax reporting
- State and local licensing requirements
Common small business tax problems
So, if you’re thinking about starting a business this year, be mindful of potential small business tax issues. Here are the most common difficulties you could face:
1 – Not paying self-employment tax
New small business owners may be surprised when filing their tax return for the first time for this reason: In addition to income taxes, you owe an additional 15.3% in self-employment tax on your net self-employment income. While employees and employers share the burden of Social Security and Medicare taxes equally by paying 7.65% each, a self-employed individual must pay the full amount.
On the bright side, you may be able to take advantage of multiple small business and self-employed tax deductions to offset the additional tax requirements, including the home office tax deduction and mileage.
Pro tip: Looking for the right form to file self-employment taxes? Learn more about Schedule SE.
2 – Not filing quarterly estimated tax payments
As a self-employed business owner, you don’t have taxes withheld from a paycheck like traditional, W-2 employees. Generally, if you expect to have a tax liability of at least $1,000, you should send quarterly tax payments to the IRS.
Not knowing or forgetting about quarterly estimated tax payments may result in significant interest and penalties. You can also get help with paying estimated taxes for your small business with our Quarterly Tax Payment Service to ensure you’re paying the lowest amount in quarterly taxes for $99 — a value of $150.
3 – Failing to report cash payments
Cash-based businesses require detailed bookkeeping to substantiate income and expenses. With cash-based businesses, Forms 1099 can be used to substantiate income. All income should be reported, whether shown on a 1099 or not. Some IRS small business audits begin with gauging if a business has reported all of its income.
Need some extra hands to manage your books? If you’re self-employed or own a business, we have the bookkeeping tools and services to keep you on track, ensure your books are accurate and save time..
4 – Over-deducting business expenses
Phones, home offices, business travel expenses, and entertainment expenses are all commonly deducted by small business owners to lower taxable income. Yet, IRS rules around business versus personal expenses are confusing for some, especially new entrepreneurs.
In fact, the IRS perceives many of these expenses to be personal in nature (and therefore not deductible). Because of this, detailed record keeping is essential. You have to prove your expenses are business related in the case of an IRS audit.
Tools can help! For mileage tracking, consider using an app-based tool like the one from Everlance. It lets you easily track your car mileage using IRS compliant rates.
5 – Failing to file – Is your small business not paying taxes?
Some small business owners don’t file because they simply can’t pay the tax balance due. There are major tax consequences associated with your small business not paying taxes. Not filing (or filing late) equates to interest and penalties, including a 25% failure to file penalty, which is tacked onto your overall tax bill if it is five months or more late.
Get help with your small business tax issues
As a new business owner, put taxes and bookkeeping at the top of your to-dos. Otherwise, you could wind up with a larger-than-normal tax bill.
But, here’s the good news: you don’t have to tackle this alone. Let Block Advisors help you file small business taxes online or with a tax pro. It’s time to establish a game plan for your small business taxes this year to help avoid potential IRS scrutiny.
Make an appointment now!