So you’ve just signed the agreement to become a franchisee. Congratulations! I bet you feel great. Let’s make sure you continue to do so by helping you to avoid the most common tax penalties small businesses face.
About one in three small businesses will face fines and penalties at some point in their operations due to mistakes, inaccuracies and other errors. The IRS has a large number of potential penalties for all sorts of mistakes. Here are the most common tax penalties for small businesses and how to avoid them.
The Five Most Common Tax Penalties and How to Avoid Them
- Late payments and filings: It can be difficult for a small business owner to keep track of the myriad of business and payroll taxes due at any time. A late payment is better than no payment, but you will incur fees for being late. Constantly paying late can also put your business at risk of being flagged for extra attention from the IRS. Remedy: Make sure you set aside time to complete and submit the appropriate payroll and business taxes when they’re due. As your business grows, consider working with a payroll partner who can handle this for you if it becomes too time consuming, whether that be through a payroll software, a PEO (professional employer organization), or payroll processing company.
- Underpayment of estimated taxes: You must pay at least 90 percent of your current year’s tax bill. Another problem is paying only small amounts upfront, and paying a big lump sum at the end of the year. Remedy: Improve your business forecasting, and make quarterly payments. Consistent payments of the same amount can help to rectify the situation and are more acceptable to the IRS than small payments up front and a lump sum later.
- Deliberate Fraud: Deliberately underreporting your income can put your business at risk for fines, penalties or both. If the IRS investigates your business and discovers an intentional effort to defraud the government, your business can face a penalty of 75 percent of the amount underreported. This is the harshest penalty imposed on a business−and it is one that is entirely preventable. Remedy: Never purposely under report your earnings just to pay less in taxes. It’s illegal, fraudulent, and it’s going to cause more problems than it’s worth. If you do not do your own accounting, go over your accounts monthly with the staff member or company who does your accounting for you to make sure everything is in line.
- Accuracy penalties: Mistakes can happen to anyone, but if the IRS believes your mistake was intentional, you’ll be penalized. Having a pattern of negligence or underpayment, will surely set off a red flag. Remedy: Hire a professional accounting firm to handle your taxes. If you hire an accounting firm, make sure they have the skills and experience necessary to handle your business taxes properly.
- Failure to pay penalties: It’s bad enough that your small business has been slapped with penalties, but failing to pay for them just adds on to your tax-related woes. If you’ve been hit with penalties, pay them promptly. Otherwise, the IRS will gladly tack on another penalty. Remedy: Pay on time. If you must delay payments, work out a time agreement with the IRS to pay back what you owe. You’ll pay a little extra, but not as much as you will with a late payment.
Get Help with Tax Questions
Many small business owners make unintentional mistakes simply because they don’t know how to handle their own accounting, finance and tax payments. Educate yourself with the following resources to prevent tax headaches.
- Contact your local SBA office. Many offer free or low-cost classes in basic business disciplines such as accounting, finance and more.
- SCORE, an association of retired business owners, may also offer mentoring or assistance.
- Read the IRS publications online and don’t hesitate to call them with questions. Although their lines are often busy in March and April during tax season, their representatives are usually helpful and can direct you to the appropriate publication online to answer your questions. They can’t teach you how to handle your taxes but they can answer quick questions.
- Hire a CPA or accounting firm to handle your small business taxes. Although the investment may seem costly, it will likely prevent any tax issues. In addition, it will give you more time to concentrate on growing your business.
When it comes to tax penalties, an ounce of prevention is indeed worth a pound of cure. Make sure you take these steps and any others recommended by your accountant to correctly manage and pay the taxes your business owes. Doing so will help you achieve success in franchising.