Beware of common mistakes at tax time

Again and again, business owners fumble tax debts

Almost everyone complains about taxes. But the real disaster is not forgetting to pay your tax bill when April 15 rolls around, or forgetting to take a deduction you should have. It happens when you own a business and you make one of the mistakes that makes certified public accountants necessary.

Following are 10 of the most common mistakes made when businesses file their taxes, according to local tax experts:

1. Payroll taxes

Getting payroll taxes wrong has to be the most common problem. In fact, if tax attorney Paul Kenny had to list the tax problems small businesses have, he would list “payroll taxes, payroll taxes, payroll taxes” as the top three.

CPAs Cheryl Fox and Bridget Masters agree that the biggest problem they encounter is payroll taxes, also known as employment taxes. Knowing how many employees one has sounds pretty basic. The problem is that payroll taxes are not that simple. They operate on a sliding scale. What you owe and when you owe it depends on how many people you have working for you.

“People get more upset about payroll taxes than anything,´ said Masters. Even worse, when times get tough, business owners don’t seem to think about taxes, or think that they automatically get some slack from local, state and federal governments. “It’s one of the first taxes that people don’t pay,” she said.

The point where people get into the most trouble is when things are going well and the number of employees they have suddenly changes. Look at it this way: Let’s say you own a small business with five employees and you’ve been in business 10 years. Suddenly a competitor goes out of business and you now have to expand to 15 employees to handle the demand. That’s when the alarm bells should be going off. One of the things that changes is your tax bill. That one nails people all the time.

2. Not hiring an accountant

This one is also very common. A competent accountant can solve most of the problems listed here. Yet there are many business owners who decide to have their accounts handled by a friend who’s good with numbers. Steve Delinger, a CPA with Angeli, Delinger and Kitchner, ticks off this one. “People put off their accounting until it’s too late,´ said Delinger. “This is a matter of allocating resources; it depends on a person’s business and experience with people.” Too often, CPAs are brought in when it’s too late. They are brought in to fix things instead of being there to prevent the problems in the first place.

Delinger thinks the problem has gotten to the point where a payroll tax service will soon be established in the area.

3. Contractor or employee?

This problem goes under various names, but the crux of the matter is confusing the difference between independent contractors and employees.

Because taxes on independent contractors are much less than taxes on employees, employers sometimes go to lengths to get their employees classified as independent contractors, sometimes with disastrous results.

Masters says there is such a disparity in taxes that the unscrupulous intentionally try to blur the distinction. “The problem is the specific rules to who is an independent contractor and who is an employee.”

Masters said a good rule of thumb is that “if someone owns their own insurance, uses their own material and keeps their own hours, they’re a consultant.”

4. Liability issues

This one’s pretty simple. Basically, it means the confusion that occurs when you’re first setting up your business. Should you incorporate or should you have another arrangement such as a sole proprietorship? You’d be amazed at how confusing it can be depending on the business owner and the business itself. The taxes are different, too. If you have a sole proprietorship, “All your personal assets can be at risk,” according to Fox. Even something like your house.

5. Estimated payment problem

This one sneaks up on people all the time. Business owners have to pay a quarterly tax based on what they make. “I’ll do people’s taxes and they’ll say, ‘What do you mean I made $60,000?’ Then they get a tax bill they can’t handle,´ said Masters. Business owners need to keep an eye on the bottom line and confer with their accountant in order to avoid this one. Above all, they should look at their quarterly payments to the IRS to avoid penalties.

6. Cash flow

This goes hand in hand with the two preceding it. Businesses have cash-flow problems all the time, but Delinger says it’s even more of a big mistake when businesses have them when they have to make their tax payments. Usually, the cause is someone not setting aside money to cover the business’ tax expenses.

“In the beginning stages, everything is hunky-dory,´ said Delinger. “Then they get their tax bill and they say, ‘huh?'”.

7. Buying a business

Here’s another reason to confer with an accountant. When business owners acquire assets, they acquire the liabilities and the sales tax on the acquisitions. You’d be amazed at how many times that goes by the boards. “Suddenly you get a letter saying you forgot to pay sales tax,” Masters said.

8. Sales tax

This one is somewhat new and basically amounts to someone forgetting their fiduciary duty. It isn’t federal, either. Almost all of the time it’s local. What happens is that businesses sometimes don’t collect the sales tax they are supposed to collect. It puzzles Masters to no end.

“How can you forget to collect sales tax?” Regardless, Masters is seeing more and more of it. “It isn’t just the federal government. States and cities have trusted you to collect their money and they want it.”

9. Use-tax problem

This one is even more esoteric. CPA Scott Bush says it’s the payment of taxes on a whole range of things bought when sales tax is not paid, like when you buy something from St. Louis and live in New York. There has been a huge rise in these kinds of sales with the advent of catalog sales and the Internet. Many business owners get into trouble because there is a tax on this kind of thing. “A lot of them don’t even know it,´ said Bush.

10. Software

Kurt Goetsch, a CPA at Geyer and Associates, says almost all the tax problems can be traced back to too much trust in accounting software. “For a long time, we didn’t see any of these sales-tax problems,” he said. Now, with accounting software like Quickbooks, they do. The problems come when people misuse the software and don’t pay attention to things like negative numbers and totals in accounts that shouldn’t be there.

When these things are ignored, they gradually get worse until a CPA is brought in to straighten them out.

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