Filing taxes is a must for every business. It’s also something most dread. Not only do companies have to worry about incurring penalties from the IRS if taxes aren’t properly filed, but there are also compliance regulations. Achieving tax security compliance doesn’t have to be a nightmare if you have an income tax compliance checklist to follow.
In this article, you’ll learn how to create an income tax compliance checklist along with a few rules to follow that will save you time and ensure you are only paying what is required.
How to Create an Income Tax Compliance Checklist
As more accounting and finance professionals, along with controllers and CFOs realize that without an income tax compliance checklist, it’s easy to miss a deduction or underpay which can affect the company’s long-term efficiency and growth goals. There are other benefits to creating a checklist before you start calculating your taxes.
- Reduce the time it takes to manage sales tax compliance, along with lowering the costs and resources needed.
- Improved accuracy when it comes to applying tax and other exemptions across all applicable transactions.
- Continue to grow the company without putting it at risk for non-compliance regulations regarding income tax.
- Improve customers’ buying experience by better managing sales tax during checkout both online and in person.
- Reduce the necessity for audits and the chances of errors in filed tax statements.
Now that you know the benefits of creating an income tax compliance checklist, there are a few rules to follow to ensure your company is tax compliant.
Realize There You Could Have a Problem with Sales Tax
Unlike personal tax forms where you are primarily claiming earned income, business IRS returns are a little different. Most of their claims apply to sales tax. It is also where many common non-compliance issues develop. Sales tax is one of the most time-consuming parts of annual filing and is estimated to take up 25% of the time spent on preparing IRS returns.
The amount of time devoted to sales tax is due to the various state and federal regulations. While federal remains the same, the states can and do differ. Instead of trying to shorten the process and just write in the sales tax on the appropriate form line, it is worth your time to ensure that your company isn’t paying too much or too little. Either of these can affect your company’s bottom line and ability to expand in lost revenue or fines.
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Understand How Nexus Affects Your Business
Nexus refers to the connection to the state that your company is located in. It registers and remits the sales tax a company owes. Since most local and state governments rely heavily on the sales tax collected from businesses to fund many of their programs, the tax code is constantly revised. This makes it difficult for companies to keep up with the changes.
There are a few factors that can change the amount of tax a business is expected to pay.
- Having remote offices and/or employees
- Expanding the business to new locations
- Introducing new products and services
- Online sales, along with using new platforms
Since the nexus is constantly changing, having a plan in place before tax season will ensure compliance and that you are only paying what is legally required.
Understand the Tax Changes if You’re Growing Your Business
As you can see, hiring more employees can affect your tax status. For many companies that are planning on expanding, this is when they start paying attention to their sales tax and how much they are paying. Keeping up with the changes to the tax laws as the business grows can take up more than 25% of your employees’ time. However, there is a solution.
Automating your taxes will simplify the process. It reduces the time employees spend researching tax codes, while also reducing errors that could result in non-compliance issues. With staff spending less time on taxes, productivity can improve in other departments.
Understanding Federal Tax Compliance Issues
Even a tax return that is supposed to boost a company’s bottom line can have challenges. There are still tax compliance issues that many businesses are still struggling with, but addressing them will prevent problems that could result in potential fines and penalties from local, state, and federal governments. Here’s what you need to know to achieve tax security compliance.
Compliance Costs
Even though it isn’t cheaper to avoid paying taxes, there are expense fines and penalties that can result in the loss of your business. It is still expensive to meet tax compliance standards. Smaller companies are at a disadvantage. The IRS estimates that organizations that realize $1 million or less annually in profits are often dedicating two-thirds of their budget to ensure tax compliance. Using an income tax compliance checklist will go a long way to reducing the cost of preparing and filing the IRS documents.
Organization of the Business
How the company is organized plays a role in how they meet income tax compliance standards. In this instance, smaller companies do come out ahead. The tax code is daunting for larger organizations that can often find themselves paying the same tax twice in different departments. When you’re organizing your business consider the tax advantages of sole ownership, a partnership, or an LLC corporation to name a few.
Risk of Underpaying Taxes
Cash transactions can put businesses at the greatest risk since there isn’t a digital copy. Smaller companies are often the ones that unknowingly understate these transactions on their tax reports. Larger companies can also face the same problem with expense reports, everything must be reported to the IRS to remain in compliance.
If a company is cited by the IRS for underpaying taxes, the penalties can be stiff. Along with resolving any owed money, the business must also pay penalties and possible interest. Using your income tax compliance checklist can ensure that you don’t miss paying taxes on every transaction.
Pay Attention to Expiring Deductions
Even without changes to the tax code, it’s rare for businesses to use the same deductions year after year. Remember, to claim a deduction you must have proof of the expense. It is easy to fall into a pattern of claiming the same deductions, especially if it’s applied for a few years. However, not keeping track of changes to the tax law can result in penalties.
Your checklist should include all new changes to the law and how they apply to the organization. For example, new markets tax credits are no longer viable, but you can claim a deduction if your business has switched to renewable power.
Understand the Difference Between Cash vs Accrual
The first thing to know is you must be consistent on your tax returns if you choose cash or accrual. The company also must meet certain requirements. For example, if it is a business with annual gross receipts between $1 and $10 million over the last three years you can choose between cash or accrual.
If you choose cash, income is recorded when the payments are received and expenses as they are paid. If you use accrual, both payments and expenses are recorded simultaneously regardless of when the money is received or sent. Once you choose a filing method, you cannot change it unless it is approved by the IRS. This means you want to look at both scenarios before committing to one on your checklist.
Employment Tax
Employment tax is almost as difficult to figure out as sales tax. Tax codes have changed at both state and federal levels. First employers must show proof of properly withheld tax from paychecks that include federal income, medicare, and social security taxes.
You must also make these tax payments on the behalf of the employees, the withheld money cannot be used to grow the business. Failing to correctly file employee tax can result in audits, along with legal and financial problems. In the 2016 fiscal year, the IRS levied over $6 billion in fines to businesses that did not properly pay and file employee income tax.
Don’t Forget About Third-Party Contractors
You might think that since you weren’t responsible for paying contractors, their companies are, that you don’t have to worry about this on your taxes. If you paid over $600 to a contractor, you need to list it under “expenditures” on your taxes.
Not including contractors on your taxes can lead to an audit. The IRS can also view the omission as unpaid employee taxes, which means you could be facing potential fines and penalties.
File On or Before the Deadline
No one wants to think about taxes, and it’s easy to let them slip until the last minute. However, this is why you have an income tax compliance checklist. The fastest and easiest way to draw the IRS’s attention is to file late. The federal agency looks more closely at businesses than private citizens. Once the tax agency is focused on your company, it’s hard to avoid an audit.
If your company is based in the U.S., there are several tax deadlines you must meet. For example, if you are operating a fiscal year that corresponds with the calendar year and filing in 2018, the deadlines for submitting your company’s taxes are;
- January 31 – All employee W-2 forms must have the date’s postmark. It also applies to some 1099 forms for workers that aren’t eligible for the EZ one.
- March 15 – If your business is classified as organized as an S corporation, you must have form 1120S in the mail. If there are partnerships involved, the 1065 form is also due.
- April 17 – This is the deadline for organizations classified as C corporations. You’ll need to have mailed for 1120 form.
There are also quarterly tax statements due. You’ll need to file form 1040 ES in April, June, September, and January.
You can ask the IRS for an extension, and it is often granted. However, if you want or need an extension, you must request it before the deadline. The time you have before the due date can change, but it’s usually within a few weeks.
State Changes
It’s not uncommon for states to change their tax laws, sometimes yearly. Remember, sales and other business taxes account for the majority of income state and local governments receive. Changes in federal policies that dictate how much assistance a state receives also prompts changes in the tax code.
Some states, in response to the federal government canceling the individual mandate for the Affordable Care Act, have implemented state-required healthcare reporting. Even though companies no longer have to account for this on federal returns, it is a requirement on some state forms. Another example is the employer payroll tax. Some states have started this in response to the recently passed federal legislation that limits state and local tax deductibility.
Conclusion
There is a lot to remember when you or someone in the company is filing the organization’s tax returns. Using an income tax compliance checklist will ensure that nothing is missed. However, creating the checklist isn’t always easy considering how quickly the tax codes can change.
If you have tax questions or aren’t sure how to create an income tax compliance checklist the experts at RSI security can help. Contact them today for a free consultation.
