Tax time is probably not your favorite time of year when you’re a small business owner. The preparation and filing process can be nerve-wracking, especially if you think you’ll owe a good chunk of money to the government.
The arrival of tax season also means you’ll likely find lots of online sources touting their business tax advice.
But how do you know you’re actually getting sound advice?
Unfortunately, not all the tax advice you find online is good advice. It’s crucial to know the difference between good and bad tax advice, so it doesn’t cost you later on.
Now, there’s really no substitute for advice from a qualified tax professional. But we’ve compiled some truly bogus examples of bad small business tax advice that’ll get you in trouble with Uncle Sam. The next time you run across one of these tips, you’ll know to steer clear.
1. If you can’t afford your taxes, just put them off.
Not filing your business taxes takes the cake among terrible tax tips. But you’ll still find online columns saying, “If you can’t pay your taxes, why bother filing, right?”
Wrong.
If you’re receiving tax forms from your lender or bank, you can bet the Internal Revenue Service (IRS) knows you have income. The IRS requires financial institutions to report income on tax forms. So even if the government doesn’t come calling right away, it will eventually.
This means you’ll be on the hook for penalties if you don’t file your business taxes. And the longer you wait to file, the higher the penalties.
If you aren’t able to file by the April 15 deadline, request an extension from the IRS. And if you need more time to pay your taxes, ask for an installment agreement to make it easier on you.
2. You don’t have to report all your income.
You may have been told you don’t really need to report all your business income if you’re an independent contractor or have a cash-based business. After all, cash is untraceable. And it’s no harm, no foul if the IRS doesn’t find out.
Sorry to break it to you, but that couldn’t be more untrue — or more unlawful. If you’re not upfront with the IRS about your income, you’re committing tax evasion. And that carries penalties of up to 5 years in prison and $250,000 in fines.
If you receive income and don’t report it, that doesn’t mean the person who paid you won’t report it on their taxes. Once the IRS figures out the discrepancy, you’ll find yourself the subject of an audit and potentially serious consequences.
Hiding income from the IRS simply isn’t worth having to constantly look over your shoulder. Save yourself the unneeded stress by making sure you report income from all sources.
3. Don’t bother with accounting software.
Maybe you think accounting software is too expensive for your business, and some online article convinced you that you didn’t need it anyway. There are always spreadsheets and good old pen and paper, so aren’t those enough?
Well, not really. Manual business accounting methods can get overwhelming pretty quickly. You can lose or misplace paper, and data entry using spreadsheets can eat up a lot of your time.
Over half of small businesses use accounting software, and with good reason. Maintaining accuracy and building a reliable picture of your business’s financial health is much easier with good accounting software. In addition, many accounting software automate tasks like bank reconciliation and reporting, so they’re a snap.
It’s a major bonus if your accounting software integrates with an invoicing and payments system like Thryv. Then you won’t find yourself hopping from one software to another comparing and inputting data.
4. You don’t need an accountant.
Filing business taxes isn’t an easy undertaking. But there are still business owners out there who insist on filing their taxes themselves. Perhaps they’ve read they can save money by not hiring an accountant to do something they can do on their own.
Unfortunately, trying to file business taxes on your own isn’t that easy. Filing correctly and making sure you account for all expenses and income takes a lot of attention to detail.
An accountant can help you spot potential filing errors as well as accurately itemize expenses and income. The cost of getting a professional to help you is well worth the money and time you’ll save down the road.
5. You can write off personal expenses as business expenses.
You’ve likely read this one before. And it’s not uncommon — writing off personal expenses as business expenses is one of the most popular (and incorrect) examples of bad small business tax advice that’ll get you in trouble.
You may have been told it’s perfectly OK to write off that trip to the Bahamas (and the tan that came with it), so long as your business funds paid for it. But this bit of bad small business tax advice couldn’t be more misguided…or illegal.
The IRS considers deducting personal expenses on your taxes fraud. You could incur serious penalties, which include possible prison time. So unless you want to spend time behind bars, think twice.
This goes for little expenses, too. You might think the IRS has bigger fish to fry than the fancy anniversary dinner you put on your business credit card. But audits can still happen when you least expect it. And you’ll have a lot of explaining to do when that day comes.
6. It’s OK to pay your employees under the table.
We get it. Payroll and employment taxes aren’t fun to deal with. And employees don’t necessarily enjoy taxes on their income, either. Some employees may even encourage you to pay them under the table to save you (and them) tax dollars.
At face value, it seems harmless. If you don’t tell and the employee doesn’t tell, you’re in the clear. But that’s a pretty big “if.”
It’s also really bad small business tax advice.
Paying employees under the table is illegal. The IRS can find out you’re doing this if an employee files for unemployment or Workers’ Compensation. And what if someone else happens to find out about your scheme and reports you? You’ll face pretty stiff legal penalties.
If you don’t want the hassle of having to deal with payroll, outsource it to a payroll processing company like ADP or Paychex. Let them do the heavy lifting for you, so you have one less thing to worry about at tax time.
The Profitable
Practice Playbook
In this free ebook, we’ll show you how to uncover hidden costs and opportunities to improve the profitability of your practice.
