According to the Small Business Administration, as of 2010, there were nearly 28 million small businesses in the U.S. For the men and women who worked hard and sacrificed much to start, build and run a business of their own; the rewards are often plentiful. However, while small business owners are savvy when it comes to their specific trade or area of expertise, many lack the financial knowledge that is often required to ensure that a business is in compliance with federal and state tax laws.
In short, it's hard to be good at all things. Small business owners would be wise to seek the advice and assistance of a financial and legal professional who can help ensure that a business owner is in compliance with applicable tax laws and that financial records are accurate and properly maintained.
While the Internal Revenue Service contends that the agency doesn't single out small business owners for audits, some of the financial practices employed by small business owners may increase the likelihood of being selected for an audit.
The following tax faux pas can not only trigger an audit, but if audited, also put a business owner at risk of incurring hefty fines, penalties and possibly criminal charges.
- Misclassifying of employees as contractors - An employer must pay payroll taxes on a worker who is designated as an employee. However, an employer can avoid paying these taxes if a worker is designated as a contractor. Seems simple, right? However, at times the line between whether or not a worker is an employee or contractor can be blurred. In general, a worker should be designated as an employee if an employer has control over how and when work is completed.
- Poor record keeping - Not only are maintaining accurate financial records a vital component to ensuring for a business' fiscal success, but the IRS also expects that business owners maintain organized and valid financial records. In the event a business is audited, the IRS will request specific documentation to refute or back up claims.
In our next blog post, we'll continue to discuss some of the tax pitfalls that, if not prepared, business owners may fall victim to.
Source: Nerdwallet.com, "5 Frequent Small Business Tax Mistakes to Avoid," Steve Nicastro, Oct. 15, 2014