As a small business owner, you probably know that willfully avoiding paying taxes will lead to severe problems with the IRS; however, IRS problems aren’t always a result of a business owner’s intentional actions. These are five ways business owners can get into trouble with the IRS that they might overlook or not realize.

1. Under-Reporting Income

All business income must be reported to the IRS. Even if you are a freelancer, receive contract payments, or are paid in cash, you must let the IRS know or risk hefty fines and penalties on top of the tax you owe on that income. Some individual self-employed people fail to pay taxes – either due to lack of knowledge about tax laws or evasion – and do not realize they are responsible for up to six years of back tax returns. Take note that if you do need to file back tax returns, many deductions are not claimable on more than the most recent three returns. Additional years, up to six, must be filed; however, the benefit of deductions is lost beyond three years.

2. Over-Reporting Expenses

Keep business expenses separate, preferably paid from a separate account and with a separate credit card, so that your expenses do not get mixed in with those for your business. The most common over-reported expenses are private travel being claimed and business travel and private miles driven and claimed as business miles. If you’re not sure what qualifies as an actual business expense, consult with your tax preparer or accountant. For a business expense to be deductible, it must be ordinary and necessary. An “ordinary” expense is common and accepted in your business; a “necessary” expense is helpful and appropriate for your business. Expenses like the cost of goods sold (for manufacturing businesses) and capital expenses (costs that are part of your investment in your business) are figured separately from business expenses.

3. Failing to Report “Trust Fund Taxes”

As an employer, you must withhold taxes from employee earnings. Those taxes are not paid to employees as wages and are held “in trust” until paid to the U.S. Treasury. Thus, the name “trust fund taxes.” These are income tax, Social Security, and Medicare taxes (aka “withholdings”). Sales tax is also considered a “trust fund” tax since it is collected from someone else like a customer or client and held until paid to the Treasury. These taxes must be paid and reported to the proper taxing authority and cannot be used for operating or financing a business. If they are, and they are not reported, it is considered tax fraud.

4. Forgetting the Self-Employment Tax

Just like an employer must withhold Social Security and Medicare taxes from employees, if you are self-employed, you must pay self-employment (SE) tax, consisting of Social Security and Medicare taxes, to the Treasury. The SE tax is 15.3 percent (12.4 percent for social security (old-age, survivors, and disability insurance) and 2.9 percent for Medicare (hospital insurance) of net self-employment income in addition to income taxes. That means it is calculated after expenses are deducted. Note that SE tax does not include any other taxes that self-employed individuals may be required to file, so these individuals must consult their tax preparer or accountant to be sure they are paying all the required taxes. Also, self-employed individuals can deduct the employer-equivalent portion of the SE tax when calculating their adjusted gross income (AGI). Also, keep in mind that the tax is paid only on net self-employment earnings, that is, income after expenses are deducted.

5. Not Paying Estimated Quarterly Taxes

As a small business owner, you do not have taxes withheld from a formal paycheck as wage-earning employees do. However, that does not mean there are no taxes due to the IRS. If a small business owner anticipates a tax liability of $1,000 or more, they must send estimated quarterly tax payments to the IRS. Not doing so can lead to a whopping end-of-year tax bill with penalties, too.

Again, as mentioned above, consult your tax preparer or trusted accountant to help you make sure you stay in the clear with the IRS.

Start planning your tax strategy today by calling 301-728-0808 now or request your free consultation online and we’ll contact you to discuss how we can reduce your tax burden.

If you have one or more people besides yourself using QuickBooks Online, you’ll need to know how to set up their accounts.

Your QuickBooks Online file contains a great deal of very sensitive information, like customers’ credit card numbers and employees’ Social Security numbers – data you don’t want to have fall into the wrong hands. You obviously trust your employees or you wouldn’t have hired them, but when it comes to security, you should implement all the safeguards you can.

QuickBooks Online can help you stay safe by limiting the access that other users have to your company file. Here’s how it works.

To get started, click the gear icon in the upper right and select Manage users. You should be listed there, of course, as the Master Administrator. Click Add user. The screen that opens will ask you what type of user you’re adding. There are four of them:

• Standard user. You can assign full or limited access to standard users, but they won’t have administrator privileges.
• Company admin. At this level, the user can see and do everything.
• Reports only. These individuals have access to all reports except those that contain payroll or contact information.
• Time tracking only. You’d assign this type to employees who only need to enter their own timesheets.

The first two count toward your user limit, but the second two do not. Make your selection and click Next. We’ll select standard user for this example.

On the screen that opens, you’ll be assigning actual access rights, telling QuickBooks Online what the user’s restrictions are. You can choose All (with or without payroll access), None (allows some activities), or Limited. Select Limited, then click in the box in front of Customer to create a check mark. You’ll see the list of specific actions that that individual can take (like creating invoices, sales receipts, and statements) and the screens that they can see (customer registers and reports, tax rates and agency settings, etc.).

There’s also a list of what they can’t do, including printing checks, viewing bank registers, and preparing a sales tax return.

Click in the box in front of Customer again to uncheck it and select Vendor. You’ll see a similar list here of what your new user can and can’t do, only its activities relate to your accounts payable.

Click Next If the user will be entering his own her own timesheets in QuickBooks Online, click the button in front of Yes, then select the correct name from the drop-down list. Click Next. Answer the user settings questions on the next screen and click Next. Enter the user’s name and email address (user ID), then click Save. QuickBooks Online will return you to the Manage Users screen, where you’ll see that your new user has been added to the list. The individual you just invited will receive an email invitation to set up an account, with instructions on how to do so.

Other Security Tips

There are other ways you can keep all of your company’s data safe. Here are some suggestions to consider if your business has returned to its offices.

• Always update your operating system and applications when prompted. These often contain security patches in addition to bug fixes and new features.
• Keep backups out of reach of others. Cloud backups are best, but if you use a local device, don’t leave it out in the open.
• Log out of QuickBooks Online when you’re not at your desk.
• Shred anything you print from QuickBooks Online or store it in a locked drawer.
• Protect your networks. Discourage excessive web browsing by employees. Don’t allow extraneous app downloading on company equipment and ask employees not to use company mobile devices on public networks. Consider network monitoring software if you can’t afford managed IT.

We follow security best practices in our own offices, and we hope you’ll do the same. Applying safeguards proactively will help prevent data theft that can be nearly impossible to recover from.

Intuit employs industry-standard security practices to keep your data safe, too, and it handles all backup and upgrades. Often, those updates include new features, like the recent addition of transaction “tags.” Let us know if you need our help with these or with any other element of QuickBooks Online.

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Are you taking on a new employee who will use QuickBooks Online? The site has a specialized setup process for this.

Did you know that you can create and use tags now in QuickBooks Online? We can show you how it’s done.

Are you concerned about the security of your QuickBooks data? Ask us how you can best protect it.

Are you considering using QuickBooks Online in 2021? We’d be happy to help you set it up for your business and learn to use it.

QuickBooks will allow your business to track daily transactions and manage cash flow so you can oversee your finances with ease and precision. Call us at 301-728-0808 to get started now or request your free consultation online.