Small business owners frequently multitask to keep their company afloat. This may result in taxes falling through the cracks or taking a back seat.
Entrepreneurs and business owners should be aware of common tax controversies. Even the smallest errors could result in costly ramifications.
Income underreporting
One of the most common tax controversies is the company’s failure to report its full income. To avoid this, small businesses must maintain accurate financial records. Utilizing a reputable accounting system and seeking professional advice can help ensure accurate income reporting.
Deductions and expenses
Another area of contention involves the deductions and expenses claimed. Excessive or inappropriate deductions can raise red flags with tax authorities. Small businesses should maintain meticulous expense records and legitimate documentation for deductions.
Employee misclassification
The IRS has strict guidelines for determining worker classification. Three factors can identify if a worker is an employee or contractor:
- Company control of the tasks involved in the worker’s job
- Company control of the financial portion of the worker’s job
- Contracts or benefits that exist between the company and employee
Documenting workers correctly is important; classifying them as independent contractors instead of employees can create tax problems.
Sales tax compliance
For small businesses in the retail sector, sales tax can be a source of controversy. Each state has distinct sales tax regulations. Failing to stay informed and compliant can result in audits and penalties.
Home office deductions
Remote work continues to be a popular option for many small businesses. While home office deductions can be legitimate, they are often scrutinized. A dedicated workspace and detailed expense records can help maintain compliance.
Estimated tax payments
Small businesses typically make quarterly estimated tax payments. Failing to do so can incur penalties and interest charges. Staying current on estimated tax payments is crucial to avoid unnecessary disputes.
Proactive steps
Small business tax controversies can be daunting, and the consequences can be severe. To avoid fines, penalties and audits, small business owners must prioritize tax compliance.