When you started your business, you probably didn’t intend to become a tax collector. But if you operate in the United States, then you are both a taxpayer and tax collector. And if you try to dodge either of those duties you could lose your business… and a whole lot more.
In some ways, running a business isn’t all that hard. Sure, you work hard in your business, but the principles by which you operate aren’t really anything complicated. In fact, this entire series is about demonstrating how common-sense, scriptural wisdom that you apply to your personal finances also applies to your business. Today, we’re looking at the importance of handling taxes correctly, just as you would with your personal fortune.
We’ve touched on personal taxes in previous posts: Months ago, we listed taxes as one of the basic life necessities that you must budget for. It can be tempting to cheat on your personal income taxes, but doing so risks getting you into big trouble. In the same way, business owners who want to avoid hard times should be scrupulously honest with their corporate tax accounting.
Corporate tax law is a huge, complicated field, and I’m not here to take the place of a good accountant or tax attorney. But I do want to point out some important points about tax and your business, and set you on the right path to handling both correctly.
Why is it so important for business owners to be careful and honest with their taxes? I know of three main reasons. First is the biblical commandment that Jesus Himself gave in Matthew 22, instructing His disciples to “give back to Caesar what is Caesar’s.”
Second is the argument from patriotic duty: One of the reasons that you have the opportunity to build a successful business is that the government provides certain laws and regulations that protect you, promote your freedoms and allow you to thrive in the marketplace. You have a duty to pay a share of your business income to support the government that does so much to support you.
The third reason is perhaps the most compelling: If you get caught cheating on your taxes, the government has the authority to royally mess up your life. They’ll come after you for every red cent that you hid from them. They can seize your property and sell it to recoup the debt. They can shut down your business. They can come after your personal finances. And if there’s evidence that you have intentionally, fraudulently dodged your taxes, they can send you to jail for a long, long time.
So how do business owners fall prey to tax mistakes? I don’t want to give you bad ideas or suggest things that would tempt you to do wrong. Rather, I want to point out some behaviors that could be getting you into trouble to make sure that you avoid them. Here are a few main areas to avoid.
1) Hiding income
Nobody wants to pay more taxes than they owe, and I fully support any taxpayer doing anything legal that he can to lower his tax bill. The right way to do this is to optimize your financial operations to claim every tax credit and deduction that you legitimately qualify for; the wrong way to do it is to hide money from the government, hoping that they won’t tax you on it. This can take a bunch of forms — perhaps the most common is to take cash payments under the table that leave no paper trail. Some business owners simply under-report their earnings and hope that they won’t get audited. This strategy may seem to work for a little while, but if you do get audited, you’re in for trouble.
2) Misrepresenting employees
If you have employees in your business, you’re responsible for paying payroll tax and portions of Social Security and other taxes on them. You’re also responsible for withholding some of their pay and remitting it to the government as tax revenue (that’s what makes you a de facto tax collector). Some people try to dodge this by keeping workers “off the books” and paying them with cash. Others do it by calling their employees “independent contractors” and leaving it to them to handle their own taxes. But the government has specific rules about who is a contractor and who is an employee. If someone is doing work for you at your facility according to a schedule that you set, they’re probably an employee. You should pay taxes on them as such.
3) Spending tax withholdings
If you have employees, you withhold some of their pay to send to the government in the form of income tax. If you sell goods to the public, you probably also collect sales tax on behalf of your state government. But you don’t actually send in those funds every time you make payroll or close a sale. Instead, you hold the money and send it to the government in bulk several times a year. It can be tempting to look at that cash as “free money” that you can use temporarily until you have to turn it in, but this is a dangerous gamble. if something goes wrong in your business and you don’t have the funds to pay the government what you owe on time, you’ll become indebted to the IRS, creating all kinds of problems that can haunt you for years to come. You should always keep the taxes you collected in a separate account that is strictly separated from your operational funds and that is strictly off-limits.
There are a lot of other tax mistakes that you can make in your business, and subtleties that go far beyond my expertise. If you have any doubts or questions, work with a qualified, certified corporate tax professional.
Whatever you do, make sure that you are careful, honest and well disciplined when it comes to your company’s tax practices. It’s the right thing to do. And besides, this is one area where you really don’t want to mess things up.
Photo by Chris Tolworthy. Used under Creative Commons License.