Small Businesses: You Want to Avoid These Common Tax Errors
A small business owner often wears different hats. They might have to wear their boss hat one day, and the employee hat the next. When tax season comes around, it might be their tax hat.
They may think of doing their own taxes as just another item to quickly cross off their to-do list. However, this approach could leave taxpayers open to mistakes when filing and paying taxes.
Accidentally failing to comply with tax laws, violating tax codes or filling out forms incorrectly can leave taxpayers and their businesses open to possible penalties. Being aware of common mistakes can also help tame the stress of tax time. Here are a few mistakes small business owners should avoid:
Filing the Correct Forms
Small business owners should review the rules for filing two commonly used employment tax returns. The two forms are:
- Form 944 Employer’s Annual Federal Tax Return
- Form 941 Employer’s Quarterly Federal Tax Return
These two forms are not interchangeable, and employers should never flip-flop between the two forms on their own, always filing in accordance with the IRS-designated filing requirement.
Here are some more details about these two forms.
Form 944, Employer’s Annual Federal Tax Return
- This form is for the smallest employers to file and pay the above-mentioned taxes only once a year, instead of quarterly.
- While this form is intended for employers who owe $1,000 or less, employers can’t file Form 944 unless they receive official IRS notification that they are eligible to do so.
- Once an employer receives notice they can file Form 944, they must file this form every year. They must continue to file Form 944, regardless of the tax they owe, unless the IRS notifies them differently.
Form 941, Employer’s Quarterly Federal Tax Return
- Report income taxes withheld from employee’s paychecks.
- Pay the employer’s portion of Social Security or Medicare tax.
If the IRS advises the employer to file Form 941 quarterly return, they must do so.
Underpaying Estimated Taxes
Small business owners should make estimated tax payments if they expect to owe $1,000 or more in taxes on their tax return after subtracting other withholdings and refundable credits.
Penalties may be applied if the owners do not make estimated payments on time or do not pay enough estimated tax. The penalty is figured separately for each payment period. Taxpayers can make estimated payments using Direct Pay or a credit or debit card by clicking here.
If you receive income unevenly throughout the year, you may be able to lower your required estimated tax payment for one or more periods by using the annualized income installment method.
As a reminder, January 15, 2020, is the last day to make an estimated tax payment to be applied to your 2019 taxes without incurring additional penalties.
Depositing Employment Taxes
Employers must deposit federal income taxes withheld and both employer and employee Social Security and Medicare taxes, either monthly or semiweekly.
- Monthly: You are a monthly depositor for a calendar year if the total taxes on Form 941, line 12, for the four quarters in your lookback period were $50,000 or less. Depositors must deposit employment taxes on payments made during the month by the 15th day of the following month.
- Semiweekly: You are a semiweekly depositor for a calendar year if the total taxes on Form 941, line 12, for the four quarters in your lookback period were more than $50,000.
- If payday falls on a Wednesday, Thursday and/or Friday, deposit employment taxes by the following Wednesday.
- If payday falls on a Saturday, Sunday, Monday and/or Tuesday, deposit employment taxes by the following Friday.
Employers must use electronic fund transfers (EFT) to make all federal tax deposits. Generally, an EFT is made using the IRS’ Electronic Federal Tax Payment System (EFTPS). You can also make an EFT by working with a tax professional, financial institution, payroll service or other trusted third party to make electronic deposits on your behalf. Click here to learn how Ericksen Krentel can help!
Penalties will be applied if the required deposits are not made timely and/or accurately. For deposits not made timely, the following penalties apply:
- Deposits made 1-5 days late: 2%
- Deposits made 6-15 days late: 5%
- Deposits made 16 or more days late, but before 10 days from the date of the first IRS notice: 10%
- Amounts that should have been deposited, but instead were directly paid to the IRS: 10%
- Amounts still unpaid more than 10 days after the date of the first IRS notice or the day on which you received notice and demand for immediate payment (whichever is earlier): 15%
The filing dates for businesses are as follows:
- March 15: Partnerships, S Corporations (including the S Corporation election)
- April 15: Corporations, Individuals (Sole Proprietorships)
If an extension was requested:
- September 16: Partnerships, S Corporations
- October 15: Corporations, Individuals (Sole Proprietorships)
Partnerships: The penalty is $205 (according to draft instructions for 2019 as of December 23, 2019) for each month or part of a month the failure to file continues multiplied by the total number of persons who were partners in the partnership during any part of the partnership’s tax year for which the return is due (for a maximum of 12 months.)
S Corporations: For returns on which no tax is due, the penalty is $205 (according to draft instructions for 2019 as of October 16, 2019) for each month or part of a month the failure to file continues multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation’s tax year for which the return is due (for a maximum of 12 months.) If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the failure to file continues, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is more than 60 days late is the lesser of the tax due or $330.
Corporations: The failure-to-file penalty for corporations is 5% of the unpaid tax for each month or part of a month the failure to file continues, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is more than 60 days late is the lesser of the tax due or $330 (according to draft instructions for 2019 as of December 3, 2019).
Individuals (Sole Proprietorships): If you don’t file your return by the due date (including extension), the penalty usually is 5% of the amount due for each month or part of a month your return is late. The penalty can be as much as 25% of the tax due. The penalty is 15% per month, up to a maximum of 75%, if the failure to file is fraudulent. If your return is more than 60 days late, the minimum penalty will be $330 or the amount of any tax you owe, whichever is smaller (according to draft instructions for 2019 as of December 16, 2019).
Not Separating Business, Personal Expenses
Business expenses must be both “ordinary and necessary,” according to the IRS. If the IRS discovers you deducted personal expenses as business expenses, it may charge penalties for the error, which could become costly.
The IRS suggests using separate banking, credit cards, etc. for personal and business expenses. Doing so can make it easier to identify legitimate business expenses, help avoid errors when claiming deductions and avoid problems in the event of an IRS audit.
Not only does mixing personal and business expenses cause issues regarding your taxes, it is also not an effective and efficient business practice. Mixing expenses does not give the small business owner an accurate financial picture of the business. It will take you longer as a business owner to track your expenses and could take your tax preparer more time to separate, which can increase your tax preparation fee.
Staff Accountant Zack Tassin contributed to this article.
About Ericksen Krentel
Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.
That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.
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