New business startups are on the rise, and that means more new business owners are facing tax season and the nightmares that can follow.
While there aren’t many tax changes that will affect small businesses this coming tax season, what’s new – along with the ever-growing tax issues that encouraging small businesses – can cause headaches if owners are not careful.
For starters, there’s a big tax bill coming up for many business owners related to the pandemic, ahead of the federal tax deadline in April 2023.
Small businesses that took advantage of the Covid measures in 2020 to defer some social security taxes had to repay 50% of the debt at the beginning of 2022. The 50% otherwise it should be on January 3, 2023.
The IRS has been sending out notices reminding business owners to pay their debts by the due date, but it’s still something that can easily fall over the line, especially if the owner isn’t careful, said Eric Bronnenkant, chief tax officer at of Betterment and is an adjunct professor of taxation at Seton Hall University.
Here are some tips to stay ahead of the IRS this income tax season.
Expect new tax forms related to Venmo, PayPal income
For the 2022 tax year, many business owners may receive forms they did not have before. This form is a 1099-K and owners who receive $600 or more in cash through a third-party processor like Venmo or PayPal should receive it. In previous years, letters were sent if payments exceeded $20,000 and if each transaction exceeded 200.
Owners’ obligations to report their income have not changed. However, owners who may have gone bankrupt in the past have more incentive to report that income because there will be a record with the government, Bronnenkant said.
It also advises owners to make sure that all payments on Form 1099-K are actually for goods and services, as opposed to a gift from a friend that is mislabeled. “You shouldn’t have to pay taxes on it because somebody gave you a 1099-K with wrong information,” Bronnenkant said.
Stop business and personal income, expenses
Many owners don’t think to draw a hard line between business and personal income and expenses, but that can be a big mistake. Consolidation of funds may be easier, but in reality it creates additional work to calculate the income and expenses of the company, and in the case of audit it can lead to possible diseases. tax headache and may end up costing more in the long run, tax experts say. .
The Wave State of Small Business Study for 2022 found that 35% of small businesses blur the line between personal and business accounts. This is even higher among small businesses, where less than half, 48%, have small bank accounts.
Comming advice is correct for bank accounts and credit cards. If a business is audited, the owner should be able to document that the expenses paid are business related. If they use a personal credit card and the business is audited, the IRS can deny these deductions and the burden of proof is on the taxpayer to show that it was a legitimate business expense, said Steve Rossman, a tax associate in the Philadelphia office. accounting and consulting firm Armanino LLP. “This could result in penalties from federal, state and local governments for lack of revenue,” he said.
File your tax return even if you can’t pay
Business owners who can’t pay their full taxes should file federal taxes and work out a payment plan, says Brad Sprong, national business tax leader for KPMG Private Enterprise. These homeowners will still pay interest on the money they owe, but they can avoid additional penalties for not filing, or filing late, which can reduce profits. – business of the company.
“It’s hard to get these sanctions lifted and the sanctions can’t be lifted and they come out right away,” Sprong said.
Business owners who need more time to work on their returns beyond the original April 15 deadline should file for an extension to avoid paying late penalties. That penalty is 5% of unpaid taxes each month, capped at 25% of the balance due, Rossman said. Owners should be sure to file an extension by the Oct. 15 deadline, he said.
Despite the extension, the owner needs to assess his tax liability and pay this amount in the first tax period. Homeowners who can’t pay the full amount at that time should pay what they can to reduce potential underpayment penalties, he said.
Set aside money to pay off your tax debt
A good rule of thumb for startups – and for all business owners to avoid a situation where they can’t pay full taxes – is to set aside 30% to 35% of income. , according to Sprong. Not filing enough may mean you have to find money to pay Uncle Sam. Here’s a real-life example of a business owner worth $100,000 who owed about $30,000 in back taxes, but didn’t have the money to pay because he used the proceeds for advertising, open houses, and other expenses. he is a different business.
“Whether you go on a payment plan with the IRS or get a loan from a bank, you’ve foregone some of your borrowing capacity,” he said.