Dealing with taxes is a fact of life for small business owners.
Annual expenditures for taxes for most owners is likely their largest outlay each year, exceeding rent or mortgage payments, marketing costs, and vehicle expenses (the only possible larger expenditure is payroll).
Beyond payments to the government for all of the taxes you pay—income taxes on profits; Social Security, Medicare, and other employment taxes like sales taxes, property taxes, and excise taxes—there are other tax-related costs: your time and effort in record keeping and fees to your tax advisors. So, taxes are a big deal.
Did you know that:
Taxes are a major concern.
Small business owners have much on their minds…revenues, customers, government regulations. But, according to a Sam’s Club survey, taxes continue to be of paramount concern to millennial and boomer micro-businesses.
The vast majority of small businesses used paid preparers.
Several years ago NFIB found that 88 percent of small businesses used paid preparers for completing their tax return. My guess is that this number is not lower now. It’s likely higher.
But this statistic is only for tax return preparation. What about your payroll taxes? Your personal estimated taxes? You may use an outside payroll provider to help with payroll taxes or do this in-house. Your personal estimated taxes, which are paid four times a year, usually are up to you. But you may turn to a paid preparer for advice.
Taxes drain time.
Even though most use paid preparers for tax return preparation, many tax chores still fall on small business owners or their employees. These include record-keeping, seeing to tax payments, and meeting or talking with preparers. How much time does it take? It depends who you ask:
- The IRS says recordkeeping needed for a self-employed individual to prepare Schedule C of Form 1040 is 3 hours and 36 minutes; return preparation and time to assemble and submit the return is projected to take an additional 3+ hours.
- The SBA found that these same business owners spent 32 hours annually on taxes.
The cost of compliance is higher on small businesses than on large ones. This burden is estimated to cost small businesses $18 to $19 billion per year.
And planning to have the cash on hand to pay tax bills is also up to you. Cash flow planning for various tax obligations can take up some time throughout the year.
The cost related to taxes — over and above the taxes — is high.
Because small businesses rely on professionals, the cost for tax return preparation and other tax matters can be $10,000 each year. And, unfortunately, it’s all too easy to make mistakes, which can cost you additional interest and penalties.
The future for taxes is murky.
What has come to be a perennial or bi-annual state of affairs for more than five years, the tax rules for 2015 are not yet settled, even though the first quarter of the year is over. The 50+ tax rules that had expired at the end of 2013 and were extended for 2014 have again expired. The House has been trying to make many favored rules for small business, including the high Sec. 179 deduction and the 100 percent exclusion for gain on the sale of qualified small business stock. The Senate has yet to take up the question of permanence, and of course, concerns about a Presidential veto of any permanent tax legislation remain.
Taxes aren’t a favorite subject of most small businesses, but attending to them has a direct impact on your bottom line.
So, my advice: pay attention to taxes throughout the year (not just at tax time), use a professional to help you (the fees you pay are probably less than what your time is worth), and watch for changes from Congress.
Tax Prep Photo via Shutterstock