Staying on top of your tax obligations is crucial if you’re a small business owner. While it’s unusual for the IRS to force you to close your doors, it does happen. Some unfortunate souls even have their personal assets seized after the authorities determine they’re ultimately responsible for their former enterprise’s unpaid trust fund tax.
Therefore, you must get on top of your financial obligations to the state and federal governments right out of the gate. Here are five tax management best practices for startups.
1. Understand Your Filing Obligations
What forms do you need to file, and when are they due? You might be in for a surprise if you recently changed your entity type and requested the IRS treat you as a corporation by filling out Form 2553.
While single-member LLCs can report their income on a Schedule C on their 1040 return, those opting to be taxed as S-corporations complete form 1120-S. Furthermore, your annual filings come due on March 15, not April.
Why would you take this election if it complicates your business taxes? It can also save you money on Social Security and Medicare taxes—your adviser can help you determine if using Form 2553 is the best bet for your unique situation.
2. Hire the Right Help
Chances are, you don’t have the time, expertise, or patience to handle your enterprise’s taxes. After all, you have a business to run and money to make. Finding the right expert is your best bet for staying in compliance and fulfilling your obligations.
It helps to understand the various accounting professionals you’ll encounter to make the right choice. Most small firms don’t need to keep a tax attorney or CPA on their payroll. Still, it helps to understand the various designations when making hiring and salary decisions.
- CPAs: These individuals have a master’s level education and pass a specialty test to practice their art. They can oversee all aspects of your firm’s tax matters, but they don’t come cheap.
- EAs: These professionals are similar to CPAs—but most of them won’t balance your books for you. They primarily focus on tax matters, although many go on to earn additional designations. Some even become licensed to practice before tax court by passing a specialized exam.
- Bookkeepers: These individuals can handle your daily accounting needs, such as tracking your income and expenses. However, they don’t have the authority to file taxes or represent you before the IRS unless they earn another designation.
Most small businesses hire a full- or part-time bookkeeper to manage their accounts. They then take their financial records to a trusted CPA or EA for filing.
3. Make the Most of Your Deductions
You could pay more in taxes than you need to—but why? You’re better off reinvesting that money in your enterprise as you continue to grow. However, you must make the most of your deductions to avoid owing a small fortune. Here are some tips to maximize your savings on your return:
- Write off your startup expenses: It costs money to start a business, but you can often deduct the price of various equipment over the next several years. Sometimes you can completely deduct the year you place them in service—talk to your tax adviser to find the best strategy.
- Keep track of bad debt: If you loan money to an employee or vendor and don’t get it back, you can deduct the loss.
- Monitor insurance and professional fees: Many professionals must maintain insurance coverage and pay for continuing education and other membership dues. You can deduct these on your taxes.
- Consider interest: Did you take out a loan to fund your business? If so, you can deduct the interest you paid.
4. Keep Your Trust Fund Sacrosanct
Most small businesses run into tax trouble because of the trust fund. When you deduct withholding from your employees’ paychecks, you should keep that money in an escrow account to forward to the authorities according to your deposit schedule. Many small businesses have monthly deposit requirements.
However, things happen when you run a business. When crunch time hits, you might feel tempted to dip into this kitty to pay for an unexpected expense. Please resist the urge, even if you fully intend to replace the money. Often, it doesn’t get returned to the account in time, and your tax problems begin multiplying.
Here’s where your personal assets enter the risky zone. Business owners are ultimately responsible for taxes due—they can’t pawn the responsibility off on their accountants. The IRS can seize personal assets to satisfy the amount in extreme circumstances.
5. Create a Secure Document Storage Solution
Nobody likes to envision the specter of an audit, but it happens. Should one strike you, you need to know where your documentation is to back up your filings.
Create a secure document storage solution. It might be best to isolate this information from other parts of your network to avoid it mistakenly falling into the wrong hands. Upload and categorize your receipts to ensure you can back up what you claim on your taxes.
Tax Management Best Practices for Startups
Business owners are ultimately responsible for their enterprise’s tax obligations. Setting up a system for managing your finances should be one of your first tasks before opening your doors.
