Small business owners have received an unexpected shock this tax season, with many owing more than expected. As the nation emerges from Covid-19, some businesses have experienced higher revenues and, therefore, higher tax liabilities than in the past two years. Tax law changes for 2022 also shocked the small business world, resulting in higher tax liabilities.
Many self-employed individuals fail to consider the difference in gross versus net pay, leaving them with an astronomical bill at tax time. When owners don’t correctly calculate their tax liability, it can create lasting financial problems, especially if they owe taxes for the previous year and for the first quarter estimates. That check hurts to write.
A larger-than-expected income tax bill isn’t the end of the world. Here is what we recommend you do.
File taxes, even if you can’t pay.
Some small businesses failed to file their small business taxes by the March 15 deadline, not because they didn’t know but because they couldn’t pay. We recommend you file right away to help avoid the IRS’s “Failure to File” penalty. Since the penalty is a percentage of the taxes you didn’t pay on time, the fees can get very expensive the longer you avoid paying them.
Extensions don’t protect you from non-payment.
Extensions are to buy you more time to file your taxes, not more time to pay them. We recommend paying your estimated tax liability on time. Your return can be amended if the amount is incorrect, but some payment is better than no payment. One way to estimate the amount you owe is to look at last year’s tax liability and add 10 percent.
Establish payment plans.
Owners who need more time to pay may qualify for short-term or long-term payment plans. We help our small business clients determine the best option for them and their cash flow. Keep in mind, with payment plans come interest penalties. If you want to avoid owing more than just your tax liability, avoid penalties, interest and fees by paying off your tax debt sooner.
Don’t double dip.
Payroll tax is collected and set aside for your small business employment obligations and is not there for your tax liabilities. Too many owners try to rob payroll tax funds to pay for personal tax liabilities only to find themselves in deeper debt. The IRS has stiff penalties for small business owners who use payroll withholdings for anything other than payroll tax.
Consider amending returns.
Don’t be afraid to look back at former tax returns. Many businesses fail to take advantage of deductions and opportunities to reduce their tax liabilities. Have your tax accountant review past returns in search of savings. For example, accelerated depreciation, often called bonus depreciation, can help lower the tax burden.
There may also be opportunities to deduct expenses, such as your home office expenses, software, advertising or certain professional service fees.
Work with a CPA.
Our CPA tax staff can help small business owners plan ahead and avoid the shock of tax liabilities. We regularly review earnings to adjust estimated payments that minimize end-of-year liabilities.
Small businesses should consider establishing tax-deferred retirement plans to help with tax savings. Thanks to recent passage of the SECURE 2.0 retirement savings legislation, there could be additional tax benefits for certain business owners who start tax-deferred retirement plans. Secure 2.0 encourages small business owners to create retirement savings plans through starter plan options and tax credits for both administrative costs in setting up a plan and making employee match contributions.
When you work with a tax professional, you should be able to keep enough cash on hand to cover your tax liabilities each quarter and at the end of the year. You shouldn’t be shocked to find out what you owe, rather armed with all of the ways you can benefit and save. Give us a call or book a free discovery session with one of our Tax Time CPA professionals. Let us help you save money.