Small business loans can be used to pay for a variety of company expenses, including taxes. As is part and parcel with the advent of every new year comes the beginning of tax season. For many small business owners, this might ultimately mean having to pay a significant chunk of change to keep Uncle Sam off their back. However, despite the financial burdens associated with having to pay taxes, the majority of small business owners find the act of preparing and filing taxes to be much more painful than actually having to pay these inescapable financial dues.
According to a 2014 survey by the National Small Business Administration, 53 percent of small business owners said the administrative burden of filing their taxes was the biggest hurdle they faced around this time of the year. This exceeded the number of people who claimed the financial burden itself was the biggest problem, as only 47 percent said they were worried by that.
Preparing all the financial documents and filling out the necessary paperwork can be a nightmare for many small business owners. Further, due to the constant regulatory changes to an already complex tax code, many owners who do not accurately file their taxes can end up coming under fire for missing important filings. Worse still, without an experienced tax preparer there to take advantage of the many deductions offered through the IRS, some small businesses can be missing out on crucial exemptions, including ones that could potentially net the company thousands and perhaps even hundreds of thousands of dollars in savings.
Finding an expert
Unfortunately, there is no one-size-fits-all solution for whether a company should hire an outside tax preparer or whether to do it themselves. Although many small business owners will no doubt have the knowledge and experience to handle this complex paperwork and filing, it might be wise to nonetheless outsource this important task to an expert. There are several good reasons why delegating this duty to an expert is the right choice.
Hiring an expert who knows the tax code – both at a federal and a state level – inside and out will ultimately be beneficial for any company. This person should know what kinds of deductions, exemptions and strategies work best for the business. As noted in Business2Community, a company can face severe penalties for filing late, underpaying estimated taxes or even including minor inaccuracies on their taxes. For small businesses with thin profit margins, having to pay a financial penalty could make or break the company’s entire annual budget.
Hire the right people
First, owners should ensure they’re working with an accredited or licensed individual. According to Business Insider there are only three types of professionals qualified to assist in the preparation and filing of taxes: certified public accountants, tax lawyers and enrolled IRS agents. Owners should ask to see any and all of the documentation necessary to ensure the person they’re hiring is the real deal. There are many types of people who might claim to be an expert or insist they have years of experience, but without the proper licensing or accreditation, it could potentially leave the company at a loss.
Properly categorize employees
One of the most important reasons to hire an outside vendor is to guarantee the company is categorizing their employees correctly and providing the right tax forms to these individuals. With the rise of the sharing economy and on-demand employees, some employers might not accurately categorize their employees. Companies must ensure they’re distinguishing between permanent and exempt employees as well as independent contractors and other on-demand workers. Owners need to guarantee they’re sending W-2 forms to employees and 1099s to freelancers on time as well, which is typically by Feb. 1. With so many various ways to classify employees along with the differences between what forms to send those individuals, it’s crucial that everything is on point.
Speak the language
Even if a small business owner outsources the company’s tax preparation and filings, it’s not enough to simply hand over financial documents and be done with it. It’s important that owners understand what is happening with the taxes and know how it affects their business. Speaking with ABC News, Emilio Escandon, an accountant with New York-based firm Morrison, Brown, Argiz & Farra, recommended asking for a copy of the tax returns and using the document as a teachable moment. With a better idea about what the government is and is not taxing, owners can make more accurate financial predictions for the coming year.
“You should always have a forward-looking approach,” said Escandon. “Owners should also know that their prior-year returns can be amended to take advantage of a loss.”
Many small business owners might not be aware of the various benefits involved in amending taxes or using their past filings to prepare for the future. However, by hiring an experienced tax expert, companies can ensure they’re not overpaying or underpaying their taxes.