Ah tax season – That time of year when we’re required to get our ducks in a row whether we’re ready or not. And as a small business owner, there are extra pieces of your tax filing puzzle you need to watch out for to make sure you’re not only following the law but also getting the most tax savings for your business.
Working with a tax professional is always the best route to go when making tax decisions for your business, but making sure your tax-filing professional has the most accurate information possible about your business is essential in order for them to provide you with the best possible guidance and file the most accurate return come tax time.
To make sure your tax business tax return goes as smoothly as possible, make sure to avoid these three common employer tax mistakes.
1. Wage and Hourly Payroll Tax Mistakes
Your business gets to deduct the compensation you pay to employees and contractors. But, minimum wage issues, overtime, holiday pay, and comp hours can complicate your payroll if you have W-2 employees and make your tax filing even more complicated. Plus, miscalculating what you’ve paid your employees, and therefore, how much tax has been paid on their earnings can have legal consequences for your company.
To avoid compensation issues, make sure your payment policies are clear and concise. If you have limitations to working hours, (for instance, you don’t provide holiday pay or overtime) make these policies crystal clear from the very beginning. Automate your payroll and tax withholding system, or hire a professional accountant to keep track of employee tax withholdings and quarterly payments.
Where possible, hire your team members as salaried employees paid the same amount each month on a regular pay schedule or as contractors on a flat-fee basis, rather than as hourly employees. This eliminates the need to track fluctuating work hours, overtime, or payroll tax. This won’t be possible for every type of role, but if you can, hiring someone as a contractor will help you get the work you need without having to worry about overtime pay, hourly time tracking, and tax withholdings.
Keeping your company payroll and tax withholdings clear and organized throughout the year will make it as easy as possible to file your business tax return and take a deduction for wages paid.
2. Beware of Misclassifying an Employee as an Independent Contractor
Misclassifying an employee as an independent contractor might seem like a convenient shortcut, but beware—the tax consequences (and employment consequences) for doing so can be costly.
Hiring independent contractors to perform work for you has benefits over hiring W-2 employees. Mainly, your business doesn’t have to pay payroll tax, as this tax is paid fully by the contractor. This makes independent contractors ideal when it comes to tax seasons, but only certain team members can be treated as independent contractors based on the level of freedom they have to perform their work.
As tempting as it may be to not have to worry about payroll tax if you hire a contractor, the misclassification of a team member can lead to hefty fines, back taxes, and employment law headaches. Plus, it's not just about who pays the payroll tax—misclassified workers may be denied essential protections like overtime pay and workers' compensation which could come back to haunt you.
So how do you avoid misclassifying an employee? To start, recognize that if you have substantial control over the work your team member does and how they do it, they are most likely an employee. If a team member has the freedom to decide what tools or methods they’re going to use for the job and operate as their own business, they are a contractor.
A safe harbor of sorts exists if you have a signed agreement outlining the contract with your independent contractors, they are taking on other clients and you are paying your independent contractors through their own business entity rather than as an individual. If you do not have a standard independent contractor agreement that you have signed by every independent contractor working for you, contact us to create a template you can use. We can also offer guidance if you aren’t sure how to classify certain members of your team.
3. Deducting Personal Expenses As Business Expenses
While it may be tempting to blur the lines between personal and business expenses, doing so can lead to trouble come tax season. Deducting personal expenses as business expenses is a common mistake that can trigger audits and hefty penalties.
It's crucial to keep your business and personal finances separate to accurately track deductible expenses and maintain compliance with tax laws. Mixing personal and business expenses not only complicates your tax filing process but also undermines the integrity of your financial records.
To avoid this mistake, maintain separate bank accounts and credit cards for your business, and keep detailed records of all business-related transactions. When in doubt, consult with a tax professional to ensure that you're correctly categorizing expenses and maximizing legitimate deductions. You may also want to check out Sandy Botkin’s most recent book: “Lower Your Taxes, Big Time.”
LIFTing Your Business Through Tax Time and Beyond
Navigating the complexities of business taxes requires careful attention to detail and adherence to tax laws, and avoiding these common tax mistakes can save you time, money, and headaches down the road. As tax season approaches, reach out to our office for expert guidance and assistance in getting your business organized for tax season and beyond.
We can connect you with my Dream Team of expert tax professionals who can not only help you file your business tax return, but provide strategic tax guidance all year round.
And as your LIFTed Business Advisor, I work with you to audit your Legal, Insurance, Financial, and Tax systems through my LIFT Business Breakthrough Session™ to make sure every area of your business is set up in the right way to achieve the business and life you love. During the Session, we'll review your current practices, address any concerns, and create a tailored strategy that safeguards your business while promoting your dream.
This article is a service of a Personal Family Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices with your business throughout life and in the event of your death. We also offer a LIFT Business Breakthrough Session™, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.