It might not be tax season but that doesn’t mean the taxing authorities aren’t monitoring your business. With more young people choosing co-working over cubicles and entrepreneurship over pensions, it is crucial to note the key mistakes first time business owners make.
Here are the 3 most common IRS and FL Department of Revenue Letters received by new business owners and solutions to prevent them:
1. Payroll Tax Failure to File
Most new business will take an average of 1-3 years before breaking even and yielding enough profit to start paying themselves a paycheck. A common mistake we see over and over again is businesses signing up for payroll taxes and not filing $0 payroll tax returns quarterly because they are not paying themselves. This is a huge no-no.
Problem: For this example, we will use Jesse who is a new found business owner of Jesse’s Dog Walking LLC. Jesse read a few online articles about the first steps to take when starting a business and step 5 mentioned payroll taxes. Jesse went on the FL Department of Revenue site and signed up for Reemployment Taxes. Jesse works his tail off but still makes less than he paid in to start the business so he does not receive a paycheck all year. Jesse did not do any further research about payroll taxes outside of his few online articles and inadvertently failed to inform himself of the additional payroll tax forms (941/940) and the deadlines. He assumes since he does not receive any email reminders or letters from FLDOR for months, that he does not need to file anything. Jesse is a common case. Do not be a Jesse.
You must still file your payroll tax returns even if they are $0. This applies to both the federal forms 941/940 and the state form RT6. A fast track to receiving both IRS & FLDOR letters about tax penalties is failing to file these forms timely. Payroll tax forms are due every 4 months (quarterly) and should be filed with the proper taxing authorities to avoid penalties.
Solution: Don’t sign up for payroll taxes until you’re ready. Work with a trusted Accountant to make sure you fully understand all deadlines as late payroll taxes can carry heavy fines.
2. Sales Tax Failure to File & Pay
Did you know there are actually 3 types of sales tax in Florida? There is the most common: general sales tax, wherein tax is paid on most purchases and sales. Next, there is use tax, wherein you pay tax to the state of FL on tax free purchases made in other states and pay tax on resale items. Lastly, there is the transient rental tax, most commonly paid by RV Parks and Mobile Home Parks where spaces are leased for under 6 months.
Problem: For this example, we will use Pete who sells baseball cards through online channels such as Amazon, Instagram and EBay. Pete incorporated his business this year as it has grown to be more than just hobby income and he is making a substantial killing online selling Aaron Judge rookie cards. Pete lives in FL and sells his cards 50% of the time to fellow Floridians and 50% of the time to other enthusiasts in other states. Pete fails to realize he is indeed selling a taxable product and should be remitting sales tax to the FLDOR. Pete does not inform himself and does not receive letters for the first 2 years of business so he assumes he is in the clear. In year 3 Pete receives an audit letter stating he is behind and owes substantial taxes and penalties. Do not be a Pete.
A common mistake by new entrepreneurs is to not sign up for, collect and remit sales tax to the FLDOR. Many industries are subject to sales tax such as retail vendors (clothing, food items, office supplies, etc. tangible items) and even lessors (office space rentals, vacation rentals, timeshares, etc.). A surefire way to owe back taxes to the FLDOR is to avoid building in the sales and use tax into your sales price and failure to remit it.
Solution: Research your industry thoroughly! Understand the different types of taxes associated with your product or service. Note: Sales Tax amounts vary by county.
3. Late S-Election Notices
So maybe you took an Intro to Entrepreneurship class in college and faintly remember that LLC’s are the way to go when forming your business? Maybe you read a few online articles and realized the benefits of an S-Corporation? Whatever the case may be, most new business owners choose this route when forming their business, assuming an LLC & S-Corporation are the same thing. Wrong.
Problem: For a simple example, we will use a college student named Dave who is starting his own tutoring business. When Dave chose to be taxed as an LLC (and is the sole member), he defaulted to a single member LLC and will now be taxed as a sole proprietor. This is fancy lingo for: Dave’s business income/expenses will need to be reported on his personal tax return on a Schedule C. This is crucial because Dave will be paying a steep amount of self-employment tax if he lets his business default to this.
Tax time comes and Dave tells his Accountant he is an S-Corporation. The Accountant properly files 2 tax returns. Dave’s personal return and Dave’s Tutoring LLC return. A few months pass and Dave receives an IRS Letter stating in fact he is NOT an S-Corporation. It takes more money, time and stationary to explain the situation to the IRS that in fact Dave was misinformed and had no clue what entity he really is. Don’t be a Dave. The IRS will send multiple letters and make you redo tax returns if you fail to know your reporting entity.
Note: If you sign up to be an LLC but want to be taxes as an S-Corporation, you will need to file form 2553 within 75 of forming your business. If you want to be taxed as a C-Corporation, you will need to file form 8832 within 75 days of forming your business. Please do your research in the beginning as it will help you understand how to make better decisions for your business moving forward.
Solution: Understand your tax entity! There are a number of different types of tax entities ranging from Non-Profits to S-Corporations to C-Corporations. Know the differences and understand how the taxes will affect your earnings.
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