Believe it or not, tax season is just around the corner. For online businesses and entrepreneurs, this can be a particularly scary time if you don't know the tricks of the trade. There is a seemingly endless list of forms to complete before filing a tax return, deadlines to meet, and important details that could be very costly if missed or ignored. We thought we’d give you a head start this year by offering our top 5 secrets for protecting your online business from the Taxman.
Secret #1: Remember Important Tax Deadlines
Tax deadlines can sneak up on you, so it’s a good idea to set yourself a reminder at least one month in advance. There are some great task management apps for desktops, Android and iOS with built in reminders and syncing across devices - or a basic desk calendar will work too! Whatever method you choose, make sure important deadlines are kept somewhere you’ll be sure to notice. Missing them could result in expensive penalties. Here are a few of the major deadlines for 2016 you’ll want to jot down:
January 31st - Forms 1099 and W2 are due. If you paid an independent contractor more than $600 or an employee more than $10 in 2015, you’ll need to provide them with a 1099 or W2.
March 15th - C corporation & S corporation tax returns due. (Forms 1120 & 1120S), or apply for a tax extension.
April 18th - Individual & Partnership tax returns due. (Forms 1040 & 1065), or to apply for a tax extension. Depending on the nature of your business, you may also need to submit additional documents to the IRS before this date.
Secret #2: Keep Your Bookkeeping Up-to-Date
Ensuring your books are up-to-date will provide an accurate view of your business’ income and expenses throughout the year. They are also your first line of defense in case you get audited. There are some easy-to-use online bookkeeping tools or over-the-counter software for small businesses which offer handy features like expense tracking, invoicing and financial reporting. These tools may also help keep records in order for your tax professional, saving valuable time and money when it comes time to file your return.
However, if the thought of having to keep track of everything yourself is a bit overwhelming, consider hiring a professional bookkeeper to avoid any issues on tax day. William D. Truax E.A., Inc. has been providing professional bookkeeping services to small businesses and online entrepreneurs for over 30 years. We’d be happy to answer any questions or help manage your books throughout the year.
Secret #3: Don't Misclassify Your Workers
If you provide a place for your workers to work, or have them work on a schedule you set, or have the right to control what they do or how they do it, you most likely have an employment relationship and not an independent contractor relationship. Both the IRS and the state government can unilaterally change your worker reporting for up to three years retroactively if they believe you have misclassified your workers, which can lead to a truly staggering tax bill. This usually occurs after one of your “independent contractors” quits or is fired, and their first stop is the unemployment office. This frequently leads to an employment audit, and the state is quick to reclassify all your workers for the last few years as employees.
The moral of this story is that you should never cut corners by trying to recast regular workers as independent contractors to save a few bucks. The resulting tax calamity can put you out of business. Don't take the risk. If workers are truly independent (for example – your accountant is independent), go ahead and treat them as independent contractors. Otherwise, you may be best off treating them as employees.
Secret #4: Understand State Sales Tax Requirements
Sales tax laws are inherently complex and can be even more confusing if you’re operating an online business in multiple states or jurisdictions. Consulting a tax professional in these situations is strongly recommended. However, let’s take a quick look at how sales tax applies to online businesses.
State tax requirements are dictated by a legal concept called ‘nexus’. Nexus means that a business needs to have some physical connection to a state in order to collect sales tax there. If your business develops nexus in a state, you must collect sales tax in that state and file a state return.
While many businesses will only have nexus within the state they are organized, there are instances where your business could develop nexus in additional states. Below are some examples of things that could result in your business having nexus in another state:
Employees – Contractor, salesperson or installer
Warehouse or call center
Hosting a pop-up shop or selling at a craft fair
A Drop Shipment Relationship
3rd Party Affiliate
You are legally required to collect sales tax in any location where your business has developed nexus. Tax laws vary between states so before you file your return, give us a call to confirm you’re meeting state sales tax requirements.
Secret #5: Keep Those Records!
Record-keeping is an essential part of every business, especially when it comes to itemizing your deductions. To maintain sufficient accounting records, it’s important to adopt a firm policy of banking all income. This includes keeping records of where all those deposits came from, paying most expenses with credit cards or checks and keeping copies of the invoices, paying as few expenses by cash as possible, and keeping receipts when you do make payments with cash. If you do have receipts, these should be saved in a central location and filed for later reference. One of the biggest mistakes you can make is to not have good and adequate records of your income and outgo, because that opens the door to the IRS being able to assign you whatever income and expense numbers they like (and legally, they can do it!). Your only defense against over-eager revenue collectors is good record keeping.
Owning and managing an online business can be a rewarding and profitable venture. With some planning and organization you can maximize your deductions and take the stress out of tax season.
William D. Truax, E.A. and his friendly team of Enrolled Agents (EAs) and licensed tax preparers have been helping online businesses and entrepreneurs stay organized and up-to-date for over 30 years. They understand how the tax system works and offer a full spectrum of financial services to help you stay organized while getting the most out of your return.
In addition, Mr. Truax is a member of the Bar of the United States Tax Court – a privilege very few EAs are granted. He is also a fellow and Accredited Tax Advisor of the National Association of Tax Professionals and a member of the National Association of Enrolled Agents.
For more information, please visit www.truax.net or click below to schedule a free consultation today!