Small Business Owners: Four Ways to Avoid Trouble with the IRS

Few things can be as frustrating and stressful to a small business owner than having to deal with the IRS. Tax issues have caused many small businesses to have to close their businesses and it could happen to anyone. Even those who aren’t intentionally avoiding taxes can find themselves in trouble with the IRS if they aren’t careful. Keep these tips in mind and you’ll have a better chance of staying out of hot water!

Don’t File Your Own Taxes

While it can be tempting to try to save a little money by completing your own taxes, this is often a major mistake. Even if you’ve done your personal taxes without a problem in the past, the chances are that you don’t have the expertise necessary to properly complete your business tax returns. When you hire a tax attorney or CPA you will not only be sure that they are done properly, but you will have someone there to fight on your behalf should the IRS attempt to come after you.

Never Dip into Withholding Money

Most small businesses that have employees will have an account set up to put the money for the Social Security or other employee withholding. It can be tempting to dip into this money to cover small, temporary financial needs. While the money may be in an account with your business name, it is not actually yours. You are simply managing it for the employees until it can be delivered to the IRS or other agency. Making withdrawals, even temporarily, can raise some major red flags.

Improper Employment Practices

Some employers are tempted to save money on employees by classifying them as independent contractors. This helps to avoid a variety of tax related expenses and limits the need for benefits and other similar items. If the IRS finds out that you have improperly classified employees as independent contractors, it can end up costing you a huge amount of money in fines and back taxes.

Treating It as a Hobby

If you’re making money, you need to be treating your business as a business. Even if it started out as a hobby you were doing it just for fun, the IRS won’t see it that way. As soon as you start making money, you need to begin keeping proper records.

If these tips are too late for you because you’re already in hot water with the IRS – don’t panic! We can help. Please contact us today to learn more.


Written by E. Morgan Maxwell

E. Morgan Maxwell

Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.

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