Episode 6: In this episode, Timalyn discusses how, as a business owner, you need to take 5 steps to avoid a tax nightmare. Timalyn has seen many business owners actually go out of business because they either didn't know about or avoided important steps related to taxes. Timalyn wants you to understand important tax issues, so you don't run into problems with the IRS.
You Don't Know What You Don't Know
Timalyn comments that in our Do It Yourself (DIY) society, many people try to handle taxes on their own. If your income and expenses are fairly simple, you might be okay using one of the online services. However, many people have situations that are much more complicated than they realize. Having an experienced professional helping you is a significant way to reduce your risk of a tax nightmare.
Step 1 – Know Your Filing Obligations
Most people are aware of the April 15th tax filing deadline. However, your business may have other filing deadlines, depending upon the type of structure your business has. Timalyn spends a significant amount of time working with clients who missed tax filing deadlines and are now faced with failure to file penalties. In some cases, she's able to abate (i.e. remove) those penalties, but it's a case by case basis.
Single Member LLC/Sole Proprietor – April 15th is the typical deadline. A single member LLC is a state-designation. You'll file a Schedule C for your business operations, as part of your personal income tax return (1040).
Corporation – April 15th is the deadline. You don't have to be a large business to be a corporation. Many doctors, attorneys, accountants and other professionals form corporations as their business entity structure.
Partnership – March 15th is the deadline. If 2 or more people come together to form a business, they have a partnership. It's important to realize you're not treated as 2 or more sole proprietors. The tax classification defaults your entity to a partnership. You have to file a 1065. Remember, your personal tax return (1040) is due on April 15th. Your state return deadline depends on the state you're in. Your business can elect to be taxed as a corporation or S-Corp, but the default results in your entity being treated as a partnership.
S-Corp – (April 15th) The S-Corp is a hybrid of a partnership and corporation. This entity files an 1120S but does not pay tax at the federal level. The profits are divided among the shareholders and that taxable income will be reported on your personal tax return.
Non-Profit – May 15th is the deadline. Unlike the above entities if a non-profit fails to file on time, the failure to file penalties are assessed on a daily basis. This type of business could risk being shut down or losing its tax-exempt status.
As a business owner, officer, partner or shareholder, it's easy to get confused by the various filing deadlines. This can sometimes lead to a sense of feeling overwhelmed. Resist the temptation to ignore the situation. Timalyn often reminds us that neither the ostrich-approach or the pray-and-wait approach is an effective way to deal with the IRS.
Step 2 – Know Your Tax Payment Obligations
When people make the transition from W-2 employee to being self-employed, you have to remember you're responsible for both the employer and employee contributions to social security and Medicare. This is called self-employment tax (if you have a Single-Member LLC, you're a Sole Proprietor or you're in a Partnership). independent contractors (1099 status) are sole proprietors by default.
Even if you made less than $10,000 in income for your job or side-gig, you still are responsible for paying your self-employment tax (FICA). This actually surprises a lot of people. More importantly, it's a significant 15.3% tax. You do get a self-employment tax deduction for half of that amount, but you have to pay the tax before you get to take the deduction.
As a business owner, you're also responsible for making quarterly, estimated tax payments. These payments will be counted toward your year-end tax liability.
Timalyn clarifies the difference between a tax liability and a tax refund. The liability is what you owe to the government. A tax refund is sent to you, because you overpaid your taxes. Some people want to avoid getting a tax refund. This means they're managing their revenues and expenses in a way that minimizes their tax liability. Others, however, like to get that check in the mail, once they've filed their taxes.
If you fail to make your quarterly, estimated tax payments (or decide not to), you'll still be responsible for the total tax liability at the end of the year. The IRS will assess an under-payment penalty because you didn't make the quarterly payments.
Timalyn recommends that you treat your quarterly tax payments as a normal business expense, just like the electric bill. Know you're responsible for them and play accordingly. The IRS doesn't ignore tax revenue. If you fall behind, the IRS can issue a tax lien or a tax levy to recoup the money owed.
Step 3 – Have a Tax Plan
The purpose of a tax plan is to develop a strategy to help you cope with your taxes, going forward. It's not just about the current or upcoming year. An effective tax plan forecasts the growth of your business and lays out a plan to help you minimize your tax liability over the next 10-15 years.
Step 4 – Maximize Your Tax Deductions
Timalyn recommends that you form a team of advisors including a tax professional, a financial advisor and a business attorney. The IRS does have a very useful small business center. When you evaluate people to potentially become one of your advisors, make sure they have practical experience working in your niche. They need to understand your type of business. Not all accounting professionals have the same type of experience. Not all attorneys focus on the same area of law. Find an expert who knows your industry.
Step 5 – Outsource Your Tax Planning and Tax Preparation
The DIY society is alive and well. However, taxes are complicated. The consequences of getting it wrong, missing deadlines, etc. can be devastating to a business. The IRS estimates the Schedule C takes 10-12 hours to prepare. Remember, the Schedule C is only one part of the sole proprietor and Single Member LLCs tax return.
Timalyn asks you to consider how valuable your time is and what you could have done or earned with that 10-12 hours (and more) spent preparing your taxes. It's often worth the money, the frustration and the time to outsource your tax preparation to an experienced professional.
The IRS information on its website to help you to better understand the various types of professionals who are authorized to help you with your tax returns. Is your preparer actually authorized to do your taxes?
Remember, these 5 steps are important. Back taxes shouldn't ruin your life. They shouldn't force you to close down your business. You need to be proactive, so you can focus on the core mission and profitability of your business.
As we conclude Episode 6, we'd like to encourage you to connect with Timalyn on social media. You'll be able to subscribe to this podcast on Apple Podcasts, Google Podcasts, Spotify, and many other podcast platforms.
Remember, Timalyn Bowens is America's Favorite EA and she's here to fill the tax literacy gap, one taxpayer at a time. Thanks for listening to today's episode.
For more information about tax relief options, visit: https://www.americasfavoriteea.com/ .
If you have any feedback, or suggestions for an upcoming episode topic, please submit it here: https://www.americasfavoriteea.com/contact.
Disclaimer: This podcast is for informational and educational purposes only. It provides a framework and possible solutions for solving your tax problems, but it is not legally binding. Please consult your tax professional regarding your specific tax situation.
