Top 5 Mistakes Maryland Businesses Make at Tax Time
All your hard work of building your business could go down the drain if you get into trouble with your taxes. Here are five of the top mistakes Maryland businesses make at tax time, and pro tips to help you avoid them.
Paying Your Taxes LateIf you file your tax return on time, but you do not send your tax payment on time, the IRS will automatically hit you with a 0.5 to 1 percent penalty for every month that you are late in paying your business taxes. The penalty keeps adding up every month until you pay in full.
PRO TIP: If you cannot pay your taxes on time, contact the IRS to set up a payment plan. If you can do so at a flat-rate fee, it might cost you less than the monthly penalty. Then take a hard look at why you were not able to pay your taxes on time and correct the problem, so you do not face this problem every year. It is hard to get ahead when you are playing catch up on your taxes.
Not Making Your Payroll Tax Deposits on TimeIf you do not make your payroll tax deposits when you are supposed to, you will face penalties, and these fines are much higher than the penalties for paying your taxes late. The reason the IRS hits you harder for failing to make your payroll tax deposits on time is that the payroll tax deposits affect your employees. Those deposits are money you are holding in trust for the IRS, either money that you withheld from your employees* paychecks, or your matching contributions. Either way, the IRS wants those trust funds without delay.
PRO TIP: If you use a payroll service to issue your paychecks and make your tax deposits, you will avoid this problem and the fines that go along with it. Also, some insiders suggest that you might lower your odds of an IRS audit by using a payroll service, since the third party is less likely to hold back payroll deposits when cash flow is weak.
Misclassifying Your EmployeesIt can be tempting to treat your employees as independent contractors, but doing so can cost you big in the end. If the worker is an independent contractor, she alone is responsible for paying all of her Social Security and Medicare taxes to the federal government, and all you have to pay is her salary or wages. If she is an employee, you are burdened with both collecting and matching your employee*s Social Security and Medicare contributions.
The pitfall is that if the worker is actually an employee under the federal guidelines, the IRS can require you (not the employee) to pay all the neglected withholding plus penalties for noncompliance with their rules on classifications of workers. You should always check the most current IRS rules on classifications, but the general yardstick is that the more freedom the worker has, the more likely he is to be an independent contractor. If, on the other hand, you control significant aspects of his work, such as when and where he must perform his services, he is more likely to be an employee.
PRO TIP: Talk with your tax advisor and check the most recent IRS guidelines. The penalties and back withholding will cost you more than the employer matching taxes if you misclassified your workers.
Deducting Personal Items as Business ExpensesMany small business owners intermingle their business and personal expenses throughout the year. You might pay a business expense with a personal credit card because you do not have the business card with you that day. You might pick up a few personal items when you are making a business purchase. When you stock up the office breakroom, it can be tempting to buy enough to stock up your home pantry as well. The IRS loves to audit business owners for mixing business and personal expenses.
PRO TIP: Always carry both your personal and business methods of payment. If you need to buy both business and personal items at the same store, have the cashier ring them up separately. Only use your business card for business expenses and your personal card for personal expenses. While this may seem like an inconvenience at the time, it will make life much easier at tax time.
Your Business Structure MattersSome forms of business structures are more tax-friendly than others, but the right one for your business will depend on the unique facts of your situation. You should not choose a business structure only on the basis of tax consequences, but tax impacts should be one of the factors you consider.
If you are a small business, an S Corporation might be a better choice for you than a C Corporation. With an S Corp, the profits flow through to you. The company does not pay the taxes * you do, but on your personal tax return, not the company*s. With a C Corp, the corporation pays taxes on its profits, and then you pay taxes on wages or dividends when received from the company. This can amount to double taxation because both you and the corporation are paying income taxes on profits, although you can defer paying income tax on profits not distributed to you when earned. Be aware that there might be enough advantages for your company to have a C Corp structure to make the double taxation worthwhile. You have to look at the entire picture.
PRO TIP: Talk with your company*s tax advisor about the tax advantages of the different businesses structures available for your company. Then talk with your company*s attorney (if not the same person) about the legal advantages, including personal legal liability, of any type of business structure you are considering.