Updated: Oct 31, 2024 By: Marios
Tax compliance is an essential part of any small business. When your company is tax compliant, you avoid legal issues and penalties, giving you more time to focus on your business goals.
This piece focuses on tips ot help you become tax-compliant and stay in good books with the IRS and other Government Obligations. But first, let’s look at the issues that cause businesses to be non-compliant.
- The cost of compliance. Small business owners may incur up to $5000 on federal regulations. A study conducted by Kansas Business Journal says these costs can rise sharply fo small businesses and startups. It even goes higher if such businesses incorrectly file their taxes. Business owners must be careful in its first year as it is the most likely cause of closure and liquidation.
- Improper business audit and structure. When starting a business, it is critical to correctly asses your structure goals and vision. Understanding these options reduces the risk of facing hefty taxes down the road. Each business owner should understand the implications of choosing a sole proprietorship, corporation, limited liability company, or partnership.
- Underpaying taxes. A company with many transactions may lose track of time and make late payments, incurring tax penalties from the IRS. Plus, the IRS may add interest in the tax penalty if it accrues.
Tips for Tax Compliance
Keep Accurate Records
Maintaining organized and accurate records is the first step to keeping your business in check. Small businesses should set up an accountable and transparent record-keeping structure. Not only is it a legal structure, it is convenient and efficient.
Businesses with a poor record-keeping culture often have errors in tax filings, legal penalties, and missed deductions. You can use a few tips to ensure your business or venture backed start up has accurate record-keeping.
First, consider third-party software that checks your admin work and ensures all transactions are in real time. Companies like Vera use AI services to help companies with all the nitty-gritty of business admin work, helping them stay in check with cross state obligations.
You can also hire an accountant who knows bookkeeping and provides insight into your business’ performance. Outsourcing accountants gives you the expertise your business needs and can save you a lot of money in the future.
Learn Everything About Tax Compliance
Knowing all the tax terminology and how it affects your business is essential. Such information helps you understand how a business works and how to factor in tax costs to your revenue. Even if you decide to Hire Vera or any other company for services, it’s crucial to understand what they’re doing.
For instance, sales tax differs in several states, and the nexus is determined by your organization’s economic activity and physical location, among other factors. It's crucial to determine your sales tax nexus so that you can pay the relevant taxes. Again, incorrect payments will only lead to more penalties.
Also, determine whether your products are eligible for sales tax. There are specific rules for certain products, some having as high as 5% sales tax on the product's price.
Understanding Estimated Quarterly Taxes
Businesses typically need to pay estimated taxes after every quarter based on the revenue collected during the three months. Missing these taxes can be costly as the penalties and interest on late penalties are always charged.
Especially businesses that opt to calculate their obligations based on every three-month interval, attention must be paid to avoiding miscalculating estimated taxes. Utilizing resources offering quick quarterly tax calculations can significantly ease managing these obligations efficiently and timely.
If your business receives a consistent annual income, you can calculate the quarterly deductions and determine how much you should pay after three months. If you don’t have a regular annual income, you can calculate the costs after the three months as you go.
It is easier to calculate your taxes yearly, but there is a high chance of overpaying or underpaying. Luckily, this can be corrected by the deadline for each payment. Calculating after every quarter is more accurate, but the business owner must dedicate some time to such ops.
Separate Business and Personal Expenses
Mixing business and personal expenses can be costly in the corporate world. If the IRS finds out you have entangled the two, it will investigate your accounts, implicating your business. Always separate your bank accounts for business and personal use to understand your cash flow and avoid unnecessary investigation by the IRS.
Understand Net and Gross Income
If your business makes less money than it used to make the products, you’re likely to incur losses. Most start-ups and small businesses confuse net and gross income.
Gross income is the amount a business makes without deducting expenses. It can also be called revenue in some instances. Net income is the amount remaining after deducting business expenses and taxes.
Navigating International Taxations
You may have started as a small business, but your first client happens to be from overseas. What do you do? In such instances, you should understand that taxation laws change, and you may no longer have to follow the ones stipulated for the United States only. That said, what exactly happens when you do business internationally?
The first hurdle with international clients is understanding that particular country's tax system. You must also grasp the tax implications of having international clients on operations, profits, and sales. Pricing rules and double taxation treaties may apply in this case. This means that you should also consider the tax implications of expats.
Foreign Accounts & Assets
If you have foreign accounts and assets, you may need to report them to the IRS. Failure to do so may result in heavy penalties, including tax evasion. You need to research and understand every country you do business. Ensure your foreign accounts and assets are well-recorded and reported. Tax professionals may help you navigate these hurdles without a hassle.
Value Added Tax(VAT) and customs duties have a considerable cost implication on your international sales. Understand the different VAT rates and duties of the country you’re dealing with. Some may require your business to register for VAT.
International Employees
If your business does remote work and you hire international employees, you may have to file a different tax return for the workers. First, they must file a W-9 form outlining the necessary employment laws and tax regulations for international employees. Consult HR experts on such matters to avoid penalties and understand how the country taxes international employees.
As you can see, understanding the new tax implications can be tricky whenever your business goes international, especially during its infant stage. Before continuing with global operations, ensure that your company is internationally compliant and has the correct documents to verify its international operations.
Also, the target country’s laws and jurisdictions regarding international business and what they need for the other party to comply with should be checked. Sometimes, it may be the other party that’s not compliant, and sometimes, the effects can trickle down to your business.
Small business owners can also leverage third-party software that uses advanced technology to streamline their work. In this case, an AI service-based software could help you identify all laws affecting your business and if you’re compliant enough to do business in the target country.
Conclusion
As we wind up, tax compliance is one of the main pillars of solving admin and other operations in your business. It is also cost-effective, and you can save thousands of dollars every financial year. Ensure you pay taxes on time and file the payments correctly and transparently.
