So you’ve set out on your own with your business venture and now you’re taking on the world. Oh, the thrill of being a small business owner - master of your destiny, captain of your ship, maker of your future. Oh, and also the doer of your own taxes. Cue the solemn music and dark clouds, right?
No one likes dealing with taxes. The founding fathers were so disturbed by taxation that they opted to caffeinate the Boston Harbor. With taxes comes the dreaded IRS. Sadly, the IRS is often imagined somewhere on the scale between Mr. Smith in “The Matrix” and Maleficent from “Sleeping Beauty.” But if you know how to stay on the bright side of the IRS, then you can go back to captaining your ship/business and not worry about being audited.
Numbers, Numbers, Numbers
The first (and main) step for keeping your business in the good graces of the IRS is to pay attention to your numbers. As a small business owner, you really cannot be too careful about checking and double checking your books. One of the top reasons for small businesses being audited is simply because the numbers on the tax return weren’t correct.
If you work for a person/company as an independent contractor and receive a 1099, your income total needs to match what the client has listed. Same goes if the situation is reversed and you are the client - all of your bottom lines need to add up.
The next crucial step in remaining compliant with the IRS is to pay attention to your records. Don’t ever assume that any expense related to your business is too insignificant to not document. Additionally, be very careful with what expenses you do attribute to your company.
By the same (frustrating) token, too much information given to the IRS can be as negative as not enough. It’s probably not necessary to count every single Starbucks latte you have when handling business. The best bet is to keep your records as accurate as possible and check with the IRS or a tax professional for additional help.
Help (or Talking Furniture) Wanted
Among the fine lines you walk as a small business owner, there is the concern of how many independent contractors you use in lieu of hiring permanent employees. Your intentions and reasons for heavily relying on contractors versus employees may be as pure as the driven snow, but to the IRS, it might appear as though you are trying to avoid shelling out for payroll taxes.
Is there a magic number/ratio of employees to contractors? Best to consult a tax professional to be sure that you are not on a slippery slope that leads to an audit. The IRS also offers tools for small business owners to help them stay within the bounds.
Write off-Schmite Off
Another way to keep yourself away from the Audit Zone is in your deductions - only deduct what you actually spend on your business. The extra bedroom that is sometimes your office, but also your sewing room and yoga studio probably will not count. If you purchase a Keurig machine for your business, then it should mostly be used for the business.
Tax laws give some breaks to businesses by allowing certain deductions to offset the taxes that the business owner has to pay. But too many deductions can be a red flag to the IRS.
Happily Ever After?
Unlike the horror stories you have may read or hear about regarding the IRS and audits, your tale does not have to be a tragedy if you make the “crossing and dotting” as much a priority as all the other parts of your business. Having an idea of what kind of taxes you need to pay when starting the business is also important.
If you have any concerns about whether you might miss something when checking your records and doing your taxes, you may consider using a professional service like 1-800-Accountants to handle all of the tedious tax issues for you.