Tax time is stressful enough without a letter from the IRS telling you to pay more money. A surprise tax bill can drain your bank account, disrupt your cash flow, and stop the progress of growth within your business. But there is a way to avoid this scenario.
You can avoid a surprise tax bill, and we’ll show you how.
What Can Lead to a Surprise Tax Bill?
To avoid a surprise tax bill, you first must understand what can cause the IRS to demand more money from your business. Here are a few reasons why your business could end up owing additional funds to the IRS.
Failing to Pay Estimated Taxes
Taxes are not due at the end of the tax year. They are due throughout the tax year. Business owners need to pay taxes in quarterly payments. If you don’t, you will owe a large chunk of money at the end of the tax year in addition to fees for not paying throughout the year.
Under-estimating Income
To know how much to pay in quarterly tax payments, you must estimate your income. If you make your payments based on income that is lower than your actual income, you could owe more in taxes. A company may earn more than they thought when they take on a lot of new business, are in a growth phase, or fail to keep their books updated.
Related: Navigate Business Growth: 6 Factors That Require Your Full Attention
Under-reporting Income and Expenses
Up-to-date books can help you assess your taxable income and determine accurate quarterly tax payments. If your books are incorrect due to failing to enter income and expenses, you will not have a complete look at your taxable income and could end up paying the wrong amount in estimated taxes.
Misclassifying Employee Tax Status
A business is responsible for paying taxes for full-time employees, such as Social Security, Medicare, and unemployment taxes. If you misclassify employees as independent contractors, you may be responsible for paying these back taxes, along with interest and penalties.
Changes in Tax Laws
When tax laws change, it can either ease or add to the tax burden your business is responsible for. Even if you have the same amount of taxable income year after year, you may have to pay more or less based on tax law changes.
Failing to Pay All Tax Collectors
Depending on the location and structure of your business, you may be required to pay federal taxes as well as other state and local taxes. If you fail to pay all required tax collectors, you could end up with an unexpected tax bill.
Related: The 10 Tax Mistakes You Don’t Want Your Small Business to Make
Failure to Remit Sales Tax
Businesses that sell goods or services may be required to pay state sales tax. Failing to collect and remit the correct amount of sales tax in your state can result in a large tax bill.
Related: Add These Important Tax Deadlines to Your Calendar
How to Avoid a Surprise Tax Bill
Once you know what can lead to a surprise tax bill, it will be easier to look out for the situations that can cause problems. Here are the steps to take to avoid the errors that can cause you to owe extra money to the IRS.
#1) Make sure your books are up-to-date.
The key to being prepared for tax sessions is having a good handle on your books. You need to know where you stand from an income and expense/deduction standpoint. Make sure you’ve captured all your business income and expenses.
Related: These 6 Small Business Tax Deductions Are Overlooked Too Often
#2) Audit your employee list.
Ensure that your employees are properly classified and that you have been depositing their withheld taxes throughout the year.
#3) Consider changes in tax laws.
Review federal, state, and local tax laws and talk to a tax advisor to see what changes may increase or decrease your tax liability.
#4) Estimate your tax liability.
Run a report and compare your taxable income to last year to see if you can expect a higher or lower taxable liability.
#5) See if you have withheld enough.
Review your tax payments from the year to see if you have withheld the proper amount.
#6) Take steps to lower your taxable income.
If you find your tax liability is higher than you thought it would be, consider taking steps to lower it. Implement tax savings plans to reduce your liability by purchasing supplies and equipment before year-end, paying employee bonuses, contributing to a retirement plan, or having clients/customers wait to pay you until January, if possible.
Related: Why You Need to Create a Tax Plan Right Now
#7) Decide if you need to make additional tax payments.
If you find you have not paid enough to cover your tax liability and you are unable to lower it, consider making an additional tax payment.
#8) Get support from professionals.
Taking the steps to avoid a surprise tax bill requires up-to-date, accurate financial reports and an understanding of tax liability and laws. Make sure you have the information you need to pay the right amount of estimated taxes throughout the year by working with a professional bookkeeper to keep your records up-to-date and a tax accountant to engage in tax planning.
Get Your Books in Order Today
The best way to avoid surprise tax bills is having up-to-date financial reporting and a strategic tax plan. To get both of these things from one company, schedule a call with CFO2U.
CFO2U offers monthly bookkeeping services and tax planning so you can get accurate tax withholding calculations and tax strategies to decrease your tax liability.
Get all the financial support and expertise you need in one place. Schedule a free discovery call with our team to see how we can get your business financials in order so you never have to worry about a surprise tax bill again. Schedule your free discovery call today.
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