Launching a product that has insufficient demand and targeting the wrong audience are among the most common reasons for a business to fail. A less common reason they go under, but one certain to kill a business that makes them, are tax mistakes. Small errors can be corrected if discovered soon enough, but many common tax mistakes literally compound with interest and fees until the firm is shut down. Here are the three most common tax mistakes small businesses make.
Not Handling Withholding Correctly
Unless you are running a company with only contractors and partners, your company needs to withhold income taxes, Social Security taxes and FICA taxes for your employees. Failing to do so will result in penalties. Withholding the money without sending it on to the IRS leads to major problems, and if they think it was done deliberately, you risk criminal charges. Conversely, failing to segregate the tax withholding funds in a separate account could result in someone spending the tax withholding funds by accident. A tax expert with an accredited master in taxation can assist you with this.
Not Handling Sales Taxes Properly
Find out if you need to deal with sales tax before you start selling your product or service. If you are obligated to collect sales tax, you will probably have to register for a sales tax permit. Then you have to set up your online shopping cart and cash registers to charge the right amount of sales tax for every transaction. Complicating matters are the complex rules regarding what is taxed and at what rate.
For example, many states exempt food from the sales tax, but disagree on what is classified as food. Thus the salted peanuts sold by your store aren’t taxed, but chocolate coated and honey roasted peanuts probably are. If you’re selling a variety of taxed and untaxed products, you’ll need an inventory management system that can track the tax rate based on the product’s inventory number.
Online shopping carts typically don’t have a sales tax associated with the purchase unless the buyer is in your same state or you’re lucky enough to live in a state that doesn’t charge sales tax, but you still need to track the sale amount for income tax purposes later. Someone who has earned an online master in taxation degree can help you do this.
Failing to Send 1099s
Even if you set up your business so that it consists entirely of partners and contractors, you can’t avoid filling out at least a few tax forms each year. You are legally required to send 1099 forms every year to individuals and partnerships you pay each year. You are required to send a 1099 form to both the contractor and the IRS if the transactions totaled over $600 over the course of the year.
Keep your personal and professional finances separate from the start to protect yourself. Piercing the corporate veil to pay your bills out of the business account puts you at risk personally in case of business failure, while trying to pay today’s bills out of the tax withholding accounts risks criminal prosecution.