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Expensive Tax Problems for Small Businesses and How to Avoid Them

Edward J Leydon Tax Attorney

Edward J. Leyden, Tax Attorney at Hollrah Leyden LLC

Charley Moore, Rocket Lawyer Founder & Chairman

This week, Rocket Lawyer Founder and Chairman Charley Moore will be joining tax attorney Edward J. Leyden and the National Federation of Independent Business (NFIB) to present a webinar on “The Top 5 Most Expensive Tax Problems for Small Businesses and How You Can Avoid Them.” If you’re a small business owner, this webinar can save you a big financial headache come tax day.  Listeners will also have a chance to ask their business tax questions — and did we mention that the webinar is free?  Below is a preview of the topics we’ll be discussing in the webinar, which takes place on Wednesday, February 23 at 9am PT / 12pm ET.  Sign up today!


1. Poor Record Keeping

Most small businesses who fail to comply with their tax reporting requirements are not dishonest, they’re just bad record keepers. Unfortunately, “my dog ate it” won’t satisfy IRS requests. To guard against problems, keep any records relating to business expenses or employee matters. If paper files are a burden, you can store your documents digitally, just be sure to keep them organized. Besides supporting your tax filings and protecting your business from legal liability, good records can help you identify deductions and provide other important insights.

2. Dubious Tax Deductible Business Expenses

Just about any “ordinary, necessary and reasonable” expense that helps you earn business income is deductible. This is a pretty broad allowance, but many small business owners are overly aggressive in deducting business expenses. Five deductions that are commonly targeted by the IRS are: entertainment, can and transportation, business gifts, home office, and equipment and supplies.

3. Payroll Tax Problems

To pay federal employment taxes, you’ll need to: withhold income, Social Security, and Medicare taxes from each employee’s wages; pay the matching amount of Social Security and Medicare taxes; and pay federal unemployment tax for each employee. You will also have to file W-2 and possibly 1099 tax forms. The penalty for not paying payroll taxes is 100% of the amount of the taxes that are owed, and must be paid in addition to the taxes owed and interest thereon.

4. Misclassifying Workers

For small business owners, choosing between hiring employees or contractors is an important decision that defines not just working relationships, but taxation as well. An employee is anyone who performs services for you where you control what will be done and how it will be done. Independent contractors also perform services for you, but you do not control the service delivery, only the end result. If the IRS believes that you have misclassified an employee as an independent contractor in an attempt to evade federal taxes, it can levy significant penalties.

5. Choosing the Wrong Corporate Structure

You have lots of options when choosing the most appropriate structure for your business. You could incorporate as a sole proprietorship, a partnership, a C corporation, an S corporation, an LLC, or a non-profit. Each corporate structure has different implications for legal liability, expenses and procedures, fundraising, and taxation. If you choose the wrong structure, you may be burdened by unnecessary costs and commitments.

If you make any of these mistakes you may be able to muddle through, that is, until the IRS comes calling. However, you don’t necessarily need to fear them. The IRS sends out several different types of notices to taxpayers, and most are nonthreatening if handled correctly. The bulk of notices sent to taxpayers just lets them know of an error or inconsistency in their tax filings. If you receive an IRS notice, stay calm. Figure out what the notice is saying, and call the IRS if you have questions. Then gather the appropriate documentation, follow the notice’s instructions, and respond. If you need help, find a tax lawyer as soon as possible.

This is a preview of our up-and-coming webinar. Be sure to sign up for the webinar today for more insights!

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