Every citizen has a legal obligation to pay taxes. This responsibility, on the other hand, might become a hardship for entrepreneurs or business owners, whereas employees are protected from such a burden. The reason for this is that employees work for these firm owners, who already deduct their wages or payroll taxes. So they have to pay an estimated little amount of taxes.
Business owners, on the other hand, must pay taxes to the IRS at estimated rates rather than set rates. If an entrepreneur has experienced losses in the early stages of his business, he may be unable to pay these estimated taxes and end up owing a lot of tax penalties to the IRS. In such a scenario, seeking help from Coast One Tax Group can take you out of this difficult situation. Small business owners may end up falling foul of payroll tax compliance.
Moreover, we’ve compiled a list of resources to assist you with your back taxes. There are tax loopholes that most entrepreneurs miss due to a lack of information and end up paying a lot of money in taxes.
Before discussing tax relief points, let’s have a review at the kind of taxes that any business tycoon might encounter.
Types Of Back Taxes For Entrepreneurs
Taxpayers can become tax debtors by underestimating these following cases.
1) Under Withholding Penalty
Under withholding penalty is levied to taxpayers when
- They don’t pay their anticipated taxes in a timely manner.
- They have deducted a sufficient amount from their taxes.
- They pay their taxes after the due date.
So, you need to pay either full taxes of last year or about 90 percent of current year taxes to avoid these under withholding back taxes.
Moreover, you can also get trapped in under withholding penalties during paying quarterly installment if your business shows a great variance in income. This discrepancy could be due to a business loss caused by a natural calamity or any other factor.
2) Early Withdrawal Penalty
Entrepreneurs who withdraw from their retirement plans before reaching retirement age, which is 59.5 years, are subject to a 10% penalty on their whole tax bill. So, if you’re thinking about making such a move, think twice because the total sum of penalty and income tax will leave you with no benefit.
3) Blunders In W-2 Forms
W-2 forms are used to report taxable income that is paid to employees by their employers. Before the deadline, the owners must send a copy of these forms to the Social Security Administration. If you do not submit them before or on the required date, you may be subject to penalties. Furthermore, you may be punished with back taxes if you make the following mistakes on W-2 forms.
- Employer Identification Number (EIN) entered incorrectly (EIN)
- Employees with incorrect names and Social Security numbers
- In the identity columns, use of labels and acronyms.
- Forgetting to complete the Section on Retirement Plans
4) IRS Audit Penalties
If the IRS discovers any discrepancies in your tax return filing, they may pay you a surprise visit and conduct an audit right away. If there is a disparity, you may be fined up to 75% of the outstanding amount, which you must pay within 21 days. If you don’t pay by the due date, your fine will be increased by 0.5 percent the following month.
5) Not Involving Deductions
When it comes to filing taxes, many business owners overlook the allowed deductions. If you have purchased machinery, for example, you do not need to include this sum in your tax return. Ignoring such authorized deductions can result in a significant tax bill. It is preferable to hire a trained accountant to avoid these scenarios. This accountant may be able to save you large money on back taxes.
Avoiding Tax Penalties Through Smart Policies And Procedures
You can adopt the following procedure to protect yourself from back taxes and live a wealthy life.
1) File Tax Returns According To Last Year Income
The most effective strategy to avoid back taxes is to file your tax returns based on your previous year’s tax earnings. This method will assist you in computing estimated taxes, which are typically calculated by calculating your prior year’s income and taxes. However, if you had a company loss this year and have been unable to pay estimated taxes, this strategy is ineffective in avoiding tax penalties.
2) Rollovers For New Businesses
Rollovers are withdrawals from your retirement plan that don’t come with any penalties for taking them early. When you apply for a rollover, you must show that you are launching a new business. In addition, you’ll also need to set up and maintain a new 401(k) plan.
3) Consult A Tax-Advisor
Your taxes and projected taxes will increase as your business expands. You should seek the advice of a tax advisor firm to maintain a balance between your business income and predicted income taxes. In order to assist tax debtors,, they implement a holistic, future-focused strategy for back tax help. You can reach out to them for specific solutions to your tax fines and guidance on how to avoid paying taxes in the future.
4) Have A Separate Account For Business
Another effective technique to avoid paying excessive taxes is to open a separate bank account dedicated solely to your business needs. As a result, you’ll have a clearer view of your business spending at the end of the year, and you’ll be able to file your taxes accordingly.
5) Use of IRS 1040-ES Worksheet
Using RS 1040-ES worksheets is the most systematic way to minimize surprise tax payments and penalties for estimated taxes. These worksheets from the IRS will walk you through evaluating your projected tax liability and bringing in some typical exemptions you may be eligible for. If you have a large quarterly fluctuation, you should fill out these forms quarterly so that you can modify your estimated tax payments on time.
Read Also: New Business Owners Guide to Sales Tax
6) File Your Taxes Timely
It is solely your ignorance if you believe you can escape IRS taxes by not filing your tax returns. The Internal Revenue Service (IRS) has broad authority and can audit your business spending at any moment. They can easily discover your concealed assets or unfiled taxes and slap you with heavy penalties, including imprisonment in some situations.
Conclusively, you must know that once you are charged with tax penalties, you have to pay them. Therefore, you need to be vigilant while calculating your income taxes so you may avoid these tax penalties in future.