Wouldn't it be amazing if we could just press a taxes button and all our business's taxes would be filed instantaneously? We can all dream...
Tax terminology, expectations, and deadlines are overwhelming even for seasoned businesses. Federal and State tax codes are complex, and they change from year to year, which makes it difficult to keep up. This is why it is so important to have a tax accountant who stays up-to-date on current on tax laws and can provide sound guidance to help your company save money, eliminate penalties, and prevent audits.
So, what exactly do you need to have in order so that your tax preparer or accountant files your taxes in a timely manner? Read on.
For a deeper dive into what your business needs to survive tax season, download our End-of-year Tax Guide and Checklist.
What you absolutely need to file taxes
Payroll concerns are a headache for most companies, and the problems are compounded if your company gets behind on collecting and organizing payroll information.
Managing subcontractors can be one of the biggest trip-ups when it comes to payroll, since they will be paid through Accounts Payable rather than through payroll. If the subcontractors are in the payroll system, it is important to do some research to confirm whether they truly are employees or contractors.
Have subcontractors complete a W9 before they start work.
Whether you have 1, 100, or 1,000 subcontractors, you need to have all employee identification numbers (EIN) or social security (SS) information on hand long before tax season rolls around. Construction companies and other businesses with high numbers of 1099 subcontractors can especially find this to be a pain point, because they end up scrambling to gather SS or EIN numbers, when all of this information should have been handled at the time of hiring. 1099s for the 2017 tax year are due January 31, 2018.
To further complicate matters, end-of-year holiday vacations can result in additional delays in subcontractor response times. Every delay in collection information translates into an even longer delay in tax preparation.
The fines for not having the correct EIN or SS information can be steep, ranging from $50 to $500 per subcontractor. If contracted workers don’t provide sufficient information, you must withhold the Federal Income Tax at the 28% rate on every payment made to the subcontractor.
The primary takeaway regarding 1099 subcontractors is that your bookkeeper must consistently and thoroughly collect and verify all necessary information. Read more about 1099s here.
Your employees are your greatest asset, so it’s important to understand that your tax practices can spill over to them. For example, if your payroll tax returns are poorly managed, you face an increased risk of audit; this risk transfers to your employees who are then more likely to be audited on their personal income tax filings.
The two most important questions to ask yourself are:
- If you sell services, do you provide your services remotely or on-site? Depending
on where you offer your services, you may need to pay taxes in several states. It’s
imperative your employees keep track of time spent at different locations and relay
that information to the HR/payroll provider.
- Are you using a payroll provider like Gusto, ADP, Paychex, Intuit Payroll, Sure Payroll, or OnPay (to name a few) or a professional employer organization (PEO)? If not, this is key to gaining efficiencies, eliminating extra work, and saving money paid out to your tax accountant, so ask your bookkeeper or accountant to set you up.
If you do use a payroll provider, congrats, you can skip the next section!
For businesses that choose to handle all payroll functions for W2s themselves (which we adamantly advise against):
Prioritize and be accurate
Be sure your bookkeeper is prioritizing the accuracy of all W2s. Every field on the W2 must be an exact match with numbers reflected on your quarterly filings (941), including: pre-tax benefits, taxable fringe benefits, Federal Income Tax, State Withholding Tax, Social Security, and Medicare. Timing can be a challenge here for many businesses, because 4th Quarter payroll taxes are due at the end of January, and annual filings are due on the same time. There is very little room for identifying and resolving discrepancies if you do not plan ahead.
Discrepancies in payroll taxes can create a red flag and trigger an IRS and/or State Department audit. Make sure your accountants are current on payroll requirements and that they’re using the latest tools. For example, your 941 should be reconciled each quarter, and you must make sure there are no changes before the 4th quarter begins. If there are variances, be sure to resolve them right away.
Again for those who choose to handle payroll themselves rather than use a payroll provider, unemployment tax for both Federal and State pose another significant consideration at tax time, even if you have very few employees. As a business, you should be making quarterly deposits through the Electronic Tax Federal Payment System (EFTPS) for Federal and the State wage reports.
Timing can be especially tricky for Federal Unemployment Tax (FUTA) deposits, since a quarterly payment must be recognized by the IRS no later than the last day of the quarter in which it is filed. For example, the unemployment tax due for the second quarter must not only be paid by June 30, it must already be in the account as available funds, with no exceptions.
For year-end filing, FUTA Form 940 (FUTA) must be filed by January 31st to avoid penalties; confirm first, however, that your employees are not working in the credit reductions States, which can cause your FUTA premiums to be high.
These details are just one reminder of how important it is for your financial team to be
educated on current tax laws and timely in filing all quarterly and annual returns. The best way to make sure all of these things are taken care of on time? Use a full service payroll provider.
Two employee healthcare issues have a significant impact on payroll taxes and your company’s annual income tax return. The first is the Affordable Care Act, or Obamacare; the second is the benefits package you provide to your employees. This is the year when many – if not most – businesses will find themselves facing penalties they have been avoiding for the past two years. Income tax filings for 2017 require mandatory compliance with the Affordable Care Act. Companies have had two years to get in compliance, and all options to delay the inevitable have passed. Form 1095C, which is required to demonstrate compliance, can be very tedious to manage. If you have not already communicated with your benefits provider to bet the information necessary to prepare the 1095C, that discussion needs to begin immediately.
As far as benefits are concerned, employee medical coverage and health savings accounts (HSAs), flow through employee W2s. Other benefits do as well, including travel reimbursements, education allowances, relocation expenses, and other taxable fringe benefits. In determining the specifics on fringe benefits, your payroll team will need to determine the intention of the benefits in order to know if they are taxable or not. If this task is outside the realm of your in-house financial team, it is critical that your company reach out to professionals who are well-versed in the tax implications related to healthcare and other benefits.
- Do you know what state every warehouse your goods are shipped out of is in?
- Are the trucks that deliver the goods owned or leased by the delivery company?
- Do you have W2 employees or lease space in several states?
All of these impact where you pay taxes.
Sales tax often presents a challenge for product-based businesses. One important detail is that every field on the 4th quarter income form, which is due by January 31, 2018, must match all sales revenue on your annual income tax return. If the amounts paid and owed do not match on the balance sheet at the end of the year, an audit will more likely be triggered for a discrepancy of 5% or more.
One complication related to sales tax is that it is sometimes recorded inaccurately as an expense, rather than a liability. Customers pay sales tax, so it is an expense to them. If your sales tax has been recorded as an expense, your income has been understated; eventually, the tax burden will compound and create a financial hardship, even if the IRS doesn’t act first. There are many complexities with regard to sales tax, which is why it’s so important to talk with a tax accountant sooner rather.
These are only a few of the many things you should be thinking about when it comes to tax season. For a more fulsome exploration of what your business should be thinking about at year-end and early 2018, as well as a comprehensive checklist of the information you need to provide your tax preparer, download our End-of-year Tax Guide.
The following Paro tax experts contributed to this article, as well as our End-of-year Tax Guide :
Philip Wong has nearly 30 years of experience in Payroll Management and Payroll Tax and Compliance. He has worked in the public, private, and non-profit sectors, and his experience extends to small companies and startups. Philip holds an MBA and undergraduate degrees in Accounting and Finance. He is a native of Boston, Massachusetts, where he currently practices.
Shaan Afridi has five years of accounting experience, with a focus on business and individual income tax return preparation. He is a CPA certified by the State of California and a chartered accountant certified by the province of British Columbia, Canada. Shaan earned his degree from San Jose State University.
Ross Sumner a CPA in the state of Virginia with more than five years of experience in tax and accounting. In addition to supporting Paro’s clients in the professional services and real estate industries, he currently works for a small firm in Midlothian, Virginia. Prior to that, he spent two years at RSM (formerly McGladrey), so he has helped individuals and en tities of all sizes and needs in a short amount of time.