That is the amount of taxes, fees, and penalties that Special Occasions Invitations owed the government in back taxes. Jorge and his wife Louisa, the business owners, had no idea.
15 years ago, Jorge and Louisa decided to chase the American dream and start their own business. They started brainstorming ideas and when a small retail space opened up on Main Street, they invested the majority of their savings into turning their hobby of creating unique event invitations into a business. They put their blood, sweat, and tears into the business. It was a successful business – so successful that they decided to expand into online sales rather quickly. Jorge and Lousia were proud to be small business owners making their own way.
Last week, they received a letter from the IRS stating that they owed $256,143.10 in taxes, fees, and penalties that haven’t been paid over the last 15 years. Jorge and Louisa were blindsided – they had filed their taxes every year and paid on time. They had never had any trouble before.
The problem was, they were only paying income taxes – not the several other types of taxes that business owners are obligated to pay.
How does a small business owner know everything they need to pay in taxes? Even if your taxes are prepared professionally, that person doesn’t know all of the ins and outs of your business and may be unaware that you are operating in a manner that requires additional taxes to be filed. As a Fractional CFO, I can identify issues related to taxes and flag them for businesses to avoid issues like back taxes. I operate as a business’ first line of financial defense by bringing awareness and knowledge of your financial status so that you aren’t missing something big. Contact me to set up a free consultation.
Tax Types Every Business Owner Should Know
Aside from income taxes, there are three types of taxes every business owner should know about: payroll taxes, business property taxes, and sales tax. These three types of taxes often throw businesses for a loop because they can be quite complex. While a basic understanding is good, there are aspects of these types of taxes that can go overlooked, which means taxes go unpaid. Over time, this can cause big issues for businesses.
Let’s take a closer look at each type of tax:
Payroll taxes are based on how much you pay your employees. These taxes go towards social security, medicare, and workers compensation (among other areas), and rates vary based on state, city, and sometimes even district.
Special district payroll taxes are also relatively common and vary widely from city to city. For example, Denver, Colorado has instituted an occupational privilege tax, which must be paid by all employees ($5.75/month) and employers ($4.00/month per employee) working within the city bounds. These types of taxes help to fund museums, new stadiums or recreation buildings, etc.
The great thing about payroll taxes? Artificial Intelligence can do it for you! There are several software options that are cheap, efficient, and easy to use and do everything from calculating payroll tax to filing the returns and making the payment using funds from your accounts. These software programs eliminate human error (such as missing a return or payment) and can also reduce the chance of employee fraud.
Business Property Taxes
You may be tempted to stop reading here because you know everything about payroll taxes I mentioned above. If that’s true, let me see if I can hit you with an element of surprise…
Business property taxes are usually assessed on all fixed assets you own, such as desks, chairs, cubicle space, and computer equipment – not just real estate.
This type of tax is usually governed by counties and depending on where you live, the process and timing for filing are different. For example, in Colorado you have to file a property report in April which then determines how much you owe in business property tax. It’s easy to forget this report because it happens around income tax time. And most businesses I work with don’t even know that it needs to be done. Check your local county website for business property tax information to find out if you have to file.
Everyone knows the basics of sales tax, but these types of taxes have many layers that can bend the mind of even the best of financial professionals. Here’s what most people don’t know: if you sell physical items in a store or online, you have to collect and remit sales taxes based on the customer’s shipping/delivery address.
Side note in case you are interested: This hasn’t always been the case for online stores. In 2018, the Supreme Court ruled in favor of the state of South Dakota who sued Wayfair, Inc. for not collecting & remitting sales tax for South Dakota residents. Wayfair didn’t think it was necessary because they only sold through their online store. If you want more information, you can review The CPA Journal’s impact statement and the Official Supreme Court Ruling.
Sales taxes get complicated because state, county, and city can all require sales tax to be collected, and some even require their own tax return, thanks to home rule jurisdictions. If you sell nationwide from an online store and your sales within a state exceed $100,000, you must collect and remit sales tax to that state. With 50 states, that can get unbearably complicated, very quickly! If this applies to your business, hiring an expert and using software to handle these types of taxes is worth every penny.
These types of sales taxes are especially concerning for businesses that are used to selling services (not taxed) who then start adding tangible items (that are taxed) to their business strategy. This switch will trigger sales taxes to start taking effect, sometimes without the business owner realizing it!
The Consequences of Not Paying Your Business Taxes
You don’t want to end up with a letter from the government like the one Jorge and Louisa received. On top of the sum of taxes owed, not paying your business taxes results in penalty fees and interest charged on what you’ve not paid (including interest on the penalties!). This compounds over time, and gets more and more expensive the longer it goes unpaid.
If you catch your unpaid tax issue before the government does, there is a chance your tax professional can send a letter to them asking for forgiveness of the interest charged and the fees. It will not waive the taxes owed amount, but they have been known to show leniency with fees if a business is proactive.
Set Up A Line Of Tax Defense For Your Business
I am a business’ strong line of defense when it comes to taxes. I can spot issues and raise awareness within your leadership team of what processes need to be implemented. I am skilled at looking at your business under a microscope to spot minute details and ask questions your tax advisor may overlook when filing income taxes. I would love to partner with your business as your line of defense for business tax protection. Contact me to set up a free consultation.