Tax problems can snowball quickly and sap the lifeblood out of a business quicker than almost any other problem.
As entrepreneurs, we come to realize quickly no one is 'withholding' from a paycheck for us and we have to be proactive about making deposits so we don't get behind with the IRS.
Some of you who filed an extension earlier this year may be filing your Corporate or LLC tax returns this week -- just a reminder the due date is September 16 -- and experiencing the shock that you didn't make enough quarterly deposits last year and are facing a big tax bill.
This can be a scary and daunting situation but the worst thing you can do is ignore the problem, go into denial and perhaps choose to not even file your tax return. This could make things even worse. Let me assure you that the penalties for not filing when you owe are even worse than just filing your tax return and working out a payment plan with the IRS a few months from now.
As for the rest of us trying to be proactive and stay on top of our tax deposits, here are a few basics to keep in mind:
1. It all starts with your federal tax deposits. These are generally due for all business owners on April 15, June 15, September 15 of the current tax year and January 15 at the beginning of the following tax year. The deposits are based on what you think you will owe at the end of the year, and yes, there are penalties if you don't deposit enough during the year.
More importantly, the penalties aren't as daunting as the shock of realizing you didn't make the proper amount of deposits and you have a big tax payment due when you file your return. That is when things can get out of control when trying to make your current year's deposits, catch up on last year and still cover payroll and regular business expenses. That's the 'snowball' I was talking about earlier.
2. What about the state tax? Yes, if you live in a state with an income-tax, you need to take this seriously as well and should certainly plan on making quarterly deposits to the state. This can easily be calculated based on your prior year's liability and coupons printed out from the applicable state website.
3. Don't forget about payroll reports and deposits. If you have an S-Corporation or you have employees, payroll deposits are critical when filing your payroll reports. This is the most serious type of quarterly deposit. The IRS treats withholdings from employee's paychecks and the match, as "sacred funds". It's not uncommon to see employers actually go to jail for keeping deposits and never remitting the funds to the IRS.
Now keep in mind that as your payroll levels increase, you may be required to make monthly or even weekly deposits for payroll taxes. The IRS doesn't want to wait around until the end of the quarter to get there funds. It also actually makes life easier on you if you make the deposits more frequently and it reduces your chance of getting behind.
4. What to do when there is uncertainty. This whole process doesn't have to be mysterious or confusing. When you file your tax return, your accountant should prepare tax deposit coupons for you to follow based on your last year's tax liability.
That said, problems can arise if your income fluctuates during the year or you file your tax return on extension well after several of your tax deposits are due.
Bottom line: Don't put on the blinders if you are questioning how much or when you should make your deposits. Try to meet with your CPA at least once or twice a year for a quick planning session and not only cover your tax strategy plan, but also your deposit schedule and estimated tax bill for the year.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Mark J. Kohler, a certified public accountant in Irvine, Calif., is a partner in the accounting firm Kohler & Eyre, and the law firm Kyler, Kohler, Ostermiller, & Sorensen LLP, specializing in business, estate and tax. He is the author of What Your CPA Isn't Telling You from Entrepreneur Press.