In the 9 years since Jonathan Barsade has run the sales tax compliance firm Exactor, he has seen businesses make the same tax filing mistakes again and again. Some are so obvious that it’s hard to believe they’re being made. But if they weren’t, there wouldn’t be a market for businesses like Barsade’s that simplify tax compliance.
With 2016′s Tax Day fast approaching, Barsade reminds small business owners of three common filing mistakes.
1. Putting the wrong forms in the wrong envelopes. “When businesses have to file multiple types of returns to federal, state, and local governments, it’s easy to misplace so many different documents and checks,” Barsade says. “You might have payroll taxes, sales tax, and use tax at the state level, then at other taxes at the county and city level and special taxes and special tax forms. If you’re a restaurant owner in Chicago you might pay a soft drink tax to the city, a food tax, an alcohol tax, and dining taxes, in addition to your standard licensing tax. Make sure you’re mailing the right check with the right return to the right agency.”
Electronic filing might eliminate those problems, but Barsade says it’s not uncommon for people to input the wrong data on a Web form. “It’s the simple errors that catch people up,” he says.
2. Skipping filing a return or a payment. “Small businesses often aren’t trying to cheat on their taxes, but instead of setting aside the money they’re going to need to make quarterly tax payments, they use all their cash for operating purposes,” Barsade says. “They think, ‘I just won’t file a tax return, or I’ll file it without a payment.’ But the tax agencies don’t like that and are rarely sympathetic with it.”
Barsade points out that delinquents are automatically assessed fines and penalties that can be “really high and out of proportion.” He recommends setting up a separate bank account and putting tax money aside there as your income comes in.
What should a business owner do if they don’t have the cash to pay the tax bill? “The best thing is to try not to get into that situation at all,” Barsade reiterates, “but if you find yourself in that situation, contact the tax agency and try to come to some type of payment arrangement.” Then, he says, “make damn sure that going forward you’re addressing it correctly. The last thing you want to do is ask the tax agency to put together a payment plan for you only to be in the same boat 6 months later.”
3. Confusing the categories. Barsade says, “Many business owners just dump all their sales into the same category, but there could be nontaxable items or consumers who aren’t taxable.” Citing non-taxable revenue, however, is a red flag that attracts the attention of the tax agencies. “They want to know why it’s non-taxable, and if they don’t see the support for that in your return, they’re going to contact you,” Barsade says. “On the other hand, if you lump everything into one category, you’re also opening yourself up to additional questions.”
Keeping sales taxes straight can be especially tricky for e-commerce businesses that sell all over the country. As you expand your scope and broaden your platform, he says, “check the tax rules of different states. It gets pretty complicated. That’s why companies like ours provide a solution.”