Overview of Business Tax Problems

In 2023, a record-breaking 5.5 million new business applications were approved in the United States. The number of new businesses being formed has increased substantially since 2019. If you’ve recently joined this statistic and become a proud business owner, then congratulations!

However, new businesses come with significant challenges, though, especially when it comes to preparing, filing, and paying your taxes.

That said, you’ll want to know more about the most common types of tax problems and how they get resolved. That way, you’ll be prepared to handle any tax issues you might encounter this year or in the years to come. Find out more about common business tax issues, how they’re handled, and how our tax resolution firm here at Seattle Legal Services PLLC can help you navigate your business tax woes below.

Common Payroll Tax Problems

Payroll tax problems often start with poor organization or restricted cash flow in a company. One common issue businesses run into with payroll taxes is disorganized records. When a business fails to keep accurate payroll records, they’re more likely to make payroll tax mistakes. To help prevent this misstep, do your best to keep up with your business’s income, expenses, and entire payroll data compiled together. Make sure to regularly monitor your reports to ensure everything is being recorded correctly.

Disorganized records can lead to a whole host of issues like processing payroll late, not updating tax rates appropriately, having inconsistent pay periods, failing to manage overtime, filing your taxes late, inaccurately reporting your tax data, or even overpaying employees.

Failure to Report Cash Payments

According to the IRS, businesses that receive a cash payment over $10,000 in a transaction must complete Form 8300 within 15 days. Form 8300 should be completed even if the $10,000 transaction is broken into several transactions or transactions that are spaced out. If the IRS considers cash payments to be related and you didn’t file form 8300, you could face a penalty.

While the term “cash” may sound self-explanatory, the IRS considers all the following as “cash payments” under this rule: coins, domestic or foreign currency, cashier’s checks, traveler’s checks, bank drafts, and money orders that are worth more than $10,000. It does not include checks.

If you forget to file form 8300 after receiving a significant cash payment, you’ll be penalized $100 for each failure to file.

Deducting Too Many Business Expenses

As a business owner, there are legitimate ways to reduce your overall tax liability. One of the main ways to do this is to report your business expenses. When your taxes are totaled, the IRS will deduct your business expenses from your business income to determine your overall taxable income.

While this is a legitimate tax strategy, you need to be careful not to overdo it and deduct too many expenses. You also never want to exaggerate your expenses or claim personal expenses as business expenses. You are entitled to claim as many deductions as you’re qualified for, but the IRS does notice when a business is excessively claiming deductions. When that’s the case, the IRS is likely to audit your returns to double-check that your expenses are all verifiable.

Estimated Quarterly Tax Payments

As your business’s taxable income increases, you’ll need to start considering paying estimated taxes. Estimated taxes pay your income, self-employment, and alternative minimum taxes. In general, sole proprietors, partners, and S corporation shareholders are all expected to make estimated tax payments when they will likely owe over $1,000 in taxes when they file a yearly return. 

You don’t need to make estimated payments when you meet all the following criteria:

  • You did not owe any tax liability the prior tax year,
  • Your prior tax year covered a 12-month period, and
  • You’ve been a U.S. citizen or resident alien the entire year

That said, it might still be worth it to pay your estimated taxes if you think you’ll owe a significant chunk when you file. Unpaid taxes can pose a huge problem if you wait until you file yearly to pay. The tax burden will be high, which could leave you with a tax debt bill you can’t afford.

Failure to Issue 1099 Forms

Does your business employ independent contractors? If you hired independent contractors who earned at least $600 or more in compensation from your business, you’re obligated to send out a 1099 form. A 1099 form reports income paid out to non-employees. 

Note that 1099 forms are not the same as a W-2. W-2 forms will be provided to employees that you withhold taxes for. Since you do not handle or withhold any taxes for independent contractors, they’ll need a 1099 instead. A failure to issue a 1099 could result in a penalty ranging from $60 to $310 per occurrence.

Trust Fund Recovery Penalty

As you start collecting income and employment taxes, you need to withhold them until you pay them. When the IRS comes to collect, they expect a timely payment. You don’t want to get caught unprepared if you haven’t been properly withholding the taxes.

Employers could face a Trust Fund Recovery penalty if they willfully or knowingly keep employee income or FICA taxes that should’ve been remitted to the IRS. The amount of your penalty will be equal to the unpaid balance of the trust fund tax. The IRS can assess this penalty against owners as well as anyone else who was responsible for the missed payments.

941 Late Payment Penalty

A 941 Form is the employer’s quarterly payroll tax return. Every month by the 15th or every other week depending on your payment schedule, employers should be making deposits on their payroll taxes. Then, each quarter, they’ll need to file a form.

Late deposits will result in a penalty of 2% of your overall tax liability if you’re 1-5 days late. If you’re 6-15 days late, you’ll be charged a 5% penalty. The fee continues to increase to 15% if you pay 10 days or more after the IRS notice was issued. On top of these penalties, expect to pay additional interest on the debt, too.

Misclassification of Workers

There are different categories of ‘workers’ under IRS laws, and it’s important to classify your employers correctly. Employees who directly work for your company and earn regular compensation from your business will fall under the scope of the W-2 form rules. 

You withhold a percentage of your employee’s taxes and provide them to the IRS. Workers who perform jobs for your business but are considered independent contractors or freelancers will fall under the scope of 1099 rules. You will not withhold any taxes from them. They are responsible for paying their own taxes.

As you can tell, misclassifying an employee could have serious consequences, especially if you haven’t been withholding taxes from an employee. Note that these rules have been redefined as of March 2024.

ERC Audits on Businesses

Have you filed an employee retention credit? This type of credit was popularized during the pandemic, but it can still be filed today. The credit offsets payroll costs for businesses that are paying employees during times of reduced revenue or operational restrictions. Claiming this credit could put you at risk of facing ERC audits.

1094/1095c and Affordable Care Act Penalties:

If your business has over 50 full-time employees, you must file Forms 1094/1095c. These forms help the government ensure that businesses are complying with the Affordable Care Act. A failure to file these forms can lead to penalties of up to $ 310 for each incorrect or unfiled return as of 2024. It’s more than double ($630) for willful violations.

This fee has increased in recent years, and it may go up in the future. Also, it’s important to note that these fees are levied per return, so the penalty will be per employee and can add up very quickly. What’s more, the fine can be doubled if you fail to give your employee a copy and fail to file.

You Can’t Afford Your Business Tax Bill

One of the most common tax problems a business can face is when they receive a tax bill that they can’t afford. Without the right preparation, tax season can be very overwhelming, especially for newer businesses. If you get a tax bill you can’t afford, don’t panic.

The IRS expects a timely payment, so there might be consequences if you don’t respond to the bill. That said, you have options including agreeing to payment plan to resolve your debt.

How to Handle Business Tax Problems

Have you encountered a business tax problem that you’re not sure how to handle? If so, consulting with a business tax resolution law firm might be a good idea. The right attorney can help you go over your options, consider your entire financial picture, and help you find a solution that helps you resolve the problem.

From unfiled returns to trust fund penalties, a lawyer’s help with these matters will prove invaluable to your business’s success.

Are You Facing Business Tax Problems?

Are you struggling to keep up with your business tax obligations? Have you fallen significantly behind? No matter how complex your taxes are or how bleak you think your tax situation is, there is a solution that can help you get back on good terms with the IRS and keep your business in good standing.

The last thing you want to happen is for your business license to get revoked or have your business shut down due to your ongoing tax situation. To ensure that doesn’t happen, it might be in your best interest to get in touch with a tax resolution firm to talk about your options and rights.

Here at Seattle Legal Services PLLC, our team can help your business determine how to best move forward with your tax situation. Even better, we can help you devise strategies that keep your business compliant in the future. If you’re ready to get started, we want to hear from you. Schedule a meeting with us now to learn more.