As the U.S. continues its recovery from the pandemic some businesses could be experiencing increased revenue but owing more taxes than in previous years. The 2022 tax law changes are also causing small businesses to receive some shocking tax bills. Newly self-employed people often confuse gross and net pay without considering taxes. Andy Phillips is the director of The Tax Institute at H&R Block. “If you have been living like the money in your bank accounts is your net salary, this can be a rude wake-up call,” he said. It can be especially vexing since the first estimate for the current tax year is generally due at the same time as last year’s tax bill, a double-whammy.
But a larger-than-expected income tax bill doesn’t have to sink the ship. File even if you cannot pay the entire IRS bill. The IRS will still penalize them for failing to file their taxes by the deadline. Some business owners may have requested an extension thinking that they could delay their payments without facing financial consequences. “It’s an extension to file, not an extension to pay,” said Kimberly Wilkinson, senior tax manager at Wiss & Company.
Check for local disaster exceptions to filing.
Certain taxpayers may be able to benefit from IRS extensions for filing last year’s taxes and 2023 estimated taxes due to disaster situations in their local area. For more information, taxpayers can visit the IRS website section dedicated to this subject. “It’s a tremendous relief for those that are impacted,” said Michael Prinzo, managing principal of tax with CliftonLarsonAllen in Greenwood Village, Colorado.
Review payment plan options.
Owners who need more time to pay may qualify for a short-term or long-term payment plan. They can visit the relevant section of the IRS’s website to see what’s available, as well as potential costs and filing options.
Owners should keep in mind the IRS’s “Failure to Pay” penalty based on how long their overdue taxes remain unpaid. Although future penalties can be reduced with a payment schedule, it is best to pay the tax as soon as you can to avoid the negative effects of interest.
Don’t dip into payroll tax money.
Sometimes small business owners with employees try to tap money earmarked for payroll taxes to pay their personal taxes. This is not allowed, and you could be hit with a heavy penalty. “It’s incredibly important that small business owners never borrow from their payroll withholdings to pay anything else,” Phillips said.
Consider personal loans, credit even at higher interest rates.
A small business owner who needs cash to pay his or her taxes might consider a bank or credit card loan or some other type of short-term financing, such as tapping an existing line of credit if available. Some of these options may have high interest rates, sometimes reaching double-digits after an increase in Federal Reserve rates. Zimmerman said, “Don’t use the IRS as your banker.” “Don’t use the IRS as your banker,” Zimmerman said.
Consider filing an amended return.
It behooves small businesses to take a second look at their tax return and consider filing an amended return if they are able to eke out additional deductions.
“Often business owners aren’t taking advantage of all the things they’re entitled to,” Prinzo said. Make sure you haven’t missed any planning opportunities. There are tax-saving rules for accelerated depreciation. This is also known as bonus depreciation. If applicable, small business owners can also deduct their home office expenses.
Personal tax benefits may also be able to reduce taxes for many small business owners. “Life changes generally mean tax changes,” Phillips said.
Work with a CPA to plan ahead, and potentially defer taxes. “Life changes generally mean tax changes,” Phillips said.
Work with a CPA to plan ahead, and potentially defer taxes.
Planning ahead with a CPA can help ensure owners aren’t blind-sided in the future.
For instance, if an owner sees in the middle of the year he or she is making more money, estimates can be tweaked to minimize some of the impact at income tax time. Wilkinson says that the goal is to pay your taxes by the end the year. Secure 2.0 encourages small business owners to create retirement savings plans through starter plan options and tax credits for both administrative costs in setting up a plan and making employee match contributions.
Nevertheless, even if you take all these steps, it’s still important to keep enough cash on hand for the next tax cycle, just in case there’s another surprise.