Tax season is typically a time of the year many individuals and businesses dread as it requires tedious review of documentation and ensuring accuracy to avoid penalties and fees. To help prevent common tax mistakes, here are some of the common tax errors employer make and tips to streamline tax season.
Common Tax Mistakes to Avoid
One of the most common tax mistakes business owners make is misclassifying their workers. Understanding the difference between 1099 employees and W-2 employees is imperative for business owners to ensure each worker’s classification is accurate.
A misclassified worker can result in liability for employee-related costs. Fines and backpay costs may include a $50 fine for each W-2 not filed, 1.5% of employee’s wages plus interest, 40% of employee’s Federal Insurance Contributions Act (FICA) tax contributions, and the full employer-matching FICA contributions. If the Department of Labor believes the employee misclassification was intentional, additional fees include 20% of all employee wages paid, all employee and employer FICA contributions, up to $1,000 criminal penalty fee for each misclassified employee, and up to one year in prison.
Misclassification repercussions do not end at paying fines or facing criminal penalties, but may also entail repaying benefits owed to each misclassified employee, such as retirement savings contributions, healthcare coverage, stock choices, overtime, paid time off, and break periods.
Insufficient Payroll Records
The IRS recommends business owners to maintain payroll records for four years minimum, which may include:
- Time sheets
- Expenses accounts
- Copies of W-2 forms
- Job evaluations
Business owners can subject themselves to audits and fines if they have insufficient payroll records. For this reason, some business experts recommend keeping payroll and employment records up to seven years for auditing purposes. Depending on your business’s record, the purpose of maintaining appropriate payroll and employment records may vary and thus, will determine your time frame for recordkeeping.
Compensating Creditors First
When cash flow slows, business owners oftentimes pay off creditors before the IRS. However, payroll factoring can be a more effective solution. Payroll factoring is when an invoice factoring business, like LSQ, buys a business’s outstanding invoices and advances up to 95% of the total funds for a lower rate. This offers immediate relief without incurring additional debt.
Form 941 (Employer’s Quarterly Federal Tax Return) Errors
Businesses who file taxes quarterly file a Form 941. However, many businesses make error when filing a Form 941. Here are some of the common Form 941 errors and how to avoid them.
- Reporting advances requested: If the advance payment of credit requested is not received, the employer should not report it on Form 941. Only advance payments of credits received should be reported on Form 941.
- Incorrectly reconciling the advance payment of the credit: If the advance payment of credit requested is received, employers must report the advance payments received on line 13f and claim the eligible credits on lines 11b, 11c, 13c and 13d of Form 941.
- Using Form 7200: Form 7200 is for the request for advance payment of employer credit.
- If an advance payment of credit is received and the employer does not report it on Form 941, the employer may receive a balance due notice. If a balance due notice is received, employers must file Form 941-X, which is an amended return reporting advance payments and claiming eligible credits.
Tax Checklist for Employers
If you are preparing to file your taxes or want a simple checklist to better understand taxes and avoid making common tax errors, here are a few tips.
Determine Your Business Type
There are different business types that require different tax forms. Here is a glossary of business types.
- Sole Proprietorship: An unincorporated business owned by a sole individual.
- Partnership: Two or more individuals who run a trade or business together.
- International Business: A business with activities in the United States or a U.S.-based business with activities in another country.
- Corporation: An entity independent from its owner.
- S Corporation: A corporation that pass corporate income, losses, deductions, and credits through shareholders for federal tax purposes.
- Limited Liability Company (LLC): A corporation where members of the company cannot be held liable for business debts or liabilities.
Understand What Each Deadline Entails
If you file taxes annually, you will need to mark your calendar for March 31.
If you file taxes quarterly, you will need to mark your calendar for April 30, July 31, October 31, and January 31.
Collect All the Documentation and Forms
The type of business will determine which forms you need to file for taxes. For example, if you have a C corporation or an S corporation, you may need to file:
- Form 1120: U.S. Corporation Income Tax Return
- Form 1120-W: Estimated Tax for Corporations
- Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return
- Form 941: Employer’s Quarterly Federal Tax Return
- Form 943: Employer’s Annual Federal Tax Return for Agricultural Employees*
- Excise Taxes*
*NOTE: These are only applicable if you conduct business in specific industries (i.e., Form 943 if you have farm employees, excise taxes on specific goods or activities).
If you’re not sure the best way to tackle your taxes or have questions regarding COVID-19 relief that may impact taxes, contact VensureHR. Our team of payroll services technicians and human resources specialists can ensure you stay up to date on the latest legal updates and remain compliant. Contact us today to learn more.
Internal Revenue Service: Employment Tax Due Dates
Internal Revenue Service: Tax Information for Businesses
Internal Revenue Service: Common errors businesses should avoid when claiming employer tax credits
Maslow Media Group
Small Business Chronicle