You can face many surprises in a business that you own and operate yourself. However, one of the most certain things to expect is taxes, whether you’re a sole trader or a large business owner.
Even if you believe you’re proficient in tax law and have made all the right decisions leading up to the end of the financial year, that doesn’t mean you won’t encounter the occasional tax-related problem.
Many business owners encounter one problem after another related to their taxes, and they often involve some of the following issues:
Failing to Withhold Taxes
When you’re self-employed and owe taxes, you may be wondering why you’re left with a tax bill and a notice for failing to withhold taxes. The tax code can be complicated, which is how many businesses get caught short at the end of the financial year.
However, tax authorities can also miscalculate the amount you need to withhold and pay for taxes, and you can be left feeling significantly disadvantaged by their incompetence. Contacting lawyers offering tax law services may be in your best interest when you receive such a letter.
Misclassifying employees as independent contractors may not seem like a big deal, but it is. Whether you intended to or not, you’re committing tax fraud. This issue is easy to uncover in an audit and may cost you a considerable amount of money in unpaid taxes.
Not Paying Self-Employment Tax
Being a business owner can be expensive, and it’s not always easy to keep track of all your tax obligations and outgoings when you’re just starting out with limited earned income.
It’s easy to assume that the only type of tax you need to pay as a self-employed person is income tax, but there’s also self-employment tax to consider. Anyone who owns their own business is required to pay it to cover Social Security and Medicare. The amount may differ for each state, but it’s 15.3% in Minnesota and many other parts of the U.S.
Tax season is most people’s least favorite time of the year, which may be why millions of people request more time to file. While the IRS may be more than happy to allow more time, that’s only if you go through the correct channels to request it.
Many business owners file late, resulting in late filing penalties that can end up costing a significant amount more than the original filing amount.
Combining Business and Personal Expenses
When you work for yourself and have slowly turned a hobby into a business, you may not have seen the importance of separating your business income from your personal expenses. After all, you may not have been all that serious about turning it into a profitable business.
However, with time, that can change, and you may need to set up dedicated bank accounts for business and personal expenditure. Failure to do so may mean that it’s challenging to distinguish between personal and business expenses, leading to deduction errors that land you in hot water.
It’s not always smooth sailing in business, especially where taxes are involved. These common problems above are just a few of the many that business owners face, often seeing the need for tax experts to step in and assist.