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17 November, 2022

Seven Reasons Dentists (Small Businesses) Get into Trouble with the IRS

As a small business owner, you have, what seems at times, to be endless responsibilities. Among your main priorities are growing your business, managing inventory, overseeing product development, and engaging with customers. 

So, you might think of doing your taxes as an annoying task that has to be done. You’d prefer to devote as little time as possible to this tedious endeavor. You may even think tax preparation and filing is something you can do yourself. Going it alone may be a big mistake. More about that later. 

Filing your company’s taxes can be a complex and challenging endeavor. The stakes are high if you make any mistakes with your business taxes. For example, if you fail to comply with tax laws, violate tax codes, or fill out forms incorrectly, your business could be subject to possible penalties and fines. 

In this article, we will present seven ways your small business could run into trouble with the IRS. After reading this article, we believe you will be able to successfully avoid these major tax mistakes and have an easier time filing your business taxes.

1)   Underpaying Estimated Taxes

As a small business owner, you will be responsible for making estimated tax payments. You are required to comply if you owe taxes of $1,000 or more when your tax return is filed. If you fail to pay sufficient taxes through withholding and estimated tax payments, you will likely receive a penalty.

2)  Filing Your Business Taxes Late

As is the case with individuals, business tax returns are required to be filed in a timely fashion. In order to prevent late filing penalties, small business owners need to be aware of all tax requirements for their type of company with respect to filing deadlines.

3)  Failing to Pay Payroll Taxes

Whenever you hire a new employee, you automatically become an unpaid tax collector for the IRS. Meaning you, as the business owner, must withhold and pay to the IRS the employee’s income taxes. 

Also, you need to withhold and pay your employee’s Social Security and Medicare taxes. You are required to make a matching contribution out of your own funds. Employers are mandated to pay these taxes to the IRS throughout the year. Small business owners typically pay them monthly. 

The most important task of a business owner is to withhold and pay Social Security, Medicare, and income taxes, according to the IRS. These types of taxes are known as “trust fund taxes” because the employer is deemed to hold the withheld funds in trust for the U.S. government. 

If you do not pay these trust fund taxes, you are subject to potentially severe penalties from the IRS. Typically, the IRS will seize a business’s assets and force the company to close down if it owes back payroll taxes. You might even do jail time for this tax payment oversight. 

At the minimum, you will need to pay all the trust fund taxes, in addition to accumulated interest. The IRS could also impose a penalty known as the trust fund recovery penalty if they find out you willfully failed to pay these taxes. 

4)  Wrongly Classifying Workers as Independent Contractors 

If you want to avoid paying payroll taxes to the IRS, you could classify a worker as an independent contractor, instead of an employee. Independent contractors aren’t eligible to receive the benefits employers are typically required to provide to employees. Worker’s compensation insurance coverage or unemployment insurance included. 

It is worth noting that a worker is not an independent contractor just because you deem her to be, or she signs a form saying so. The worker has to actually be in business for herself. A worker who is solely dependent on your small business for her livelihood and subject to your direction and control on the job, is your employee, regardless of the label you use. 

Be aware misclassifying  workers as independent contractors can result in numerous audits. The misclassificationcould lead to costly assessments that have the potential to shut down your business. This potential consequence is why it is crucial to take great care when you classify a worker as an employee or an independent contractor. Make sure you have the proper documentation to substantiate your classification. 

 5)  Failing to Separate Business and Personal Expenses 

You may be inclined to use one credit card for all your expenses, and this activity is especially true if your business is a sole proprietorship. This strategy can put you in a bind as it could be difficult to determine legitimate business expenses from personal ones. 

By merging your business and personal expenses, you may make mistakes when you claim deductions. This mistake could quickly become a problem if you personally, or your business, is ever audited. 

 6)  Violating Federal and State Labor Laws 

Your employees have many rights under federal labor and anti-discrimination laws. These laws do the following: 

Ø  Make it illegal for employers to discriminate against employees on the bases of race, religion, age, gender, color, disability, or national origin. 

Ø  Protects employees who choose to unionize 

Ø  Imposes minimum wage and overtime pay requirements on employers. 

A majority of these federal and state labor laws – other than certain nondiscrimination laws – apply solely to employees, not to independent contractors. 

 7)  Violating Federal Immigration Law 

There are many workers in this country who are immigrants. However, some of these immigrants work illegally, meaning they aren’t U.S. citizens, and they don’t possess a green card or other documentation pertaining to their legal status. 

Business owners must confirm their employees are either U.S. citizens or nationals, or legal aliens authorized to work in the U.S. In order to comply, the employer and employee must complete USCIS Form I-9. The employee has to provide identifying information and documents establishing his citizenship status, like a driver’s license, U.S. passport, or Social Security card. The employer needs to keep this form. However, it does not have to be filed with the IRS. 

You don’t have to verify citizenship for an independent contractor. However, it is still illegal to hire a worker who you know is an illegal alien. If you do, the federal government could impose a fine of up to $2,000 for the first offense.

Leave Business Tax Preparation and Filing to a Professional 

The IRS encourages small business owners to explore using a reputable tax preparer including certified accountants. Having a knowledgeable and skilled tax professional managing your taxes means they will be done efficiently, correctly, and prevent your business from incurring penalties and fines. 

Look to DrillDown Solution for Expert Tax Planning Services for Your Small Business 

DrillDown Solution delivers a seamless tax planning and compliance process.  As is the case with all of our programs, tax planning solutions are custom-made based on the needs, wants, and the goals of your business.  You can expect your business to greatly benefit from our dedicated team of tax experts, ensuring your tax planning needs are met quickly and efficiently.  

At the core of our tax planning services is the promise to you that we will devise a tax strategy aimed at reducing your liabilities and optimizing profits for your business. 

Our Provo, Utah Tax Planning Services are just what your small business needs.

Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Ed Gabriel is President and Partner at DrillDown Solution. With over 20 years of experience, he holds a bachelor's degree in accounting from Brigham Young University and is a Certified Public Accountant (CPA).