Common Small Business Mistakes That Accountants Can Help With

There are over one million small businesses in Pennsylvania, which is a large majority of all the businesses in our state. But most of these business owners are not adept at bookkeeping, finance, or tax management. They need the help of an expert accountant or CPA to keep them from making serious mistakes that will affect their success or survival and potentially get them in trouble with the IRS and state and local tax departments. Below are just a few of the mistakes you can help them avoid.

• Missing due dates: Significant fees and interest can accrue if a business doesn’t send in its quarterly estimated tax payments or end-of-year filings on time.

• Underestimating taxes due: Companies are also expected to send fairly accurate estimated payments. Underpayment, even if submitted on time, can lead to penalties.

• Not putting aside money for taxes: If a company does not plan for tax payments, the money may not be there when it’s time to pay.

• Not depositing employment taxes: Employers are expected to deposit the taxes they withhold, as well as their employer portion, through electronic fund transfers. Failure to do so, or doing it incorrectly, can lead to penalties.

• Forgetting about some taxes: There are, unfortunately, many different taxes – federal, state, and local. They include payroll tax, sales tax, self-employment tax, property tax, and many others. All need to be planned for and paid in a timely manner to avoid additional financial or legal penalties.

• Not collecting taxes on out-of-state online purchases: Forty-three states require companies to collect and submit taxes when consumers in their state buy online.

• Missing tax benefits: If the business owner does not have an accountant or CPA handling the taxes, the business could pay more tax than is necessary.

• Commingling assets: This is particularly common with new businesses and entrepreneurs. It is critically important for business owners to maintain separate accounts for business and personal expenses and to meticulously log use of shared assets, such as the car or household expenses. For example, logging miles used for business will allow appropriate deduction of auto expenses. Without that documentation, the business owner may be in trouble in the case of an audit.

• Incorrectly classifying workers or paying under the table: Paying employees off the books is risky. It is considered a form of tax fraud, and the IRS aggressively prosecutes it. Employers must also understand when a worker can be considered a contractor (1099) versus an employee (W-2 and tax withholding).

• Underreporting income: The IRS compares the income reported to other documentation that is submitted. Discrepancies are closely examined.

• Not reporting cash and cash-like transactions: Third-party payment processors now report transactions to the IRS. A company that conducts its business through PayPal, Venmo, Zelle, and other such platforms must report these transactions.

• Taking unlawful deductions or deducting incorrectly: A company may have some reasonable deductions, but deducts them incorrectly, leading to IRS scrutiny. But a business owner may also try to decrease revenue on the books by deducting things that should not be deducted or by enhancing his/her lifestyle and writing it off as a business expense: for example, purchasing a sports car and writing it off as a business car; taking a fancy vacation and calling it a business trip; taking excessive home office deductions.

• Entity selection: Is the business entity right for the business? Is it the best option for that company’s taxes? Whether a sole proprietorship, partnership, LLC, C corporation, or S corporation, each structure has its pros and cons and different tax requirements. A business owner should get the advice of an experienced CPA or business start-up expert to determine what is best.

• Disorganization: A company that is not consistently tracking income or expenses, keeping documentation, or creating regular reporting to evaluate cash flow and company growth is not going to be very successful and may not last long. Small businesses need someone with strong financial and accounting skills to support them and help ensure success.

As a PA accountant or CPA, you are in the position to help your small business clients avoid these costly mistakes. It’s important to develop a method of regular communication with your clients to make them aware of these potential errors and invite them to reach out to you for additional services. Maintaining a blog or social media presence to share some of your expertise and helping companies avoid tax mistakes that can cost them money can also draw more small business clients to your firm.