IRS Tax Obligations, Small Business Owners, Payroll

Use the IRS Small Business Tax Calendar to Keep Up With Important Payroll Tax Dates (See link at end of article)   Even if you outsource your payroll duties, you are ultimately responsible for reporting your payroll tax information correctly.

 

 

Tips for Employers Who Outsource Payroll Duties

 

Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers and reporting agents. Reputable third-party payers can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer’s behalf and filing required payroll tax returns with state and federal authorities.

Though most of these businesses provide very good service, there are, unfortunately, some who do not have their clients’ best interests at heart. Over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Examples of these successful prosecutions can be found on IRS.gov.

Like employers who handle their own payroll duties, employers who outsource this function are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee’s share of social security and Medicare taxes. This is true even if the employer forwards tax amounts to a PSP or RA to make the required deposits or payments. For an overview of how the duties and obligations of agents, reporting agents and payroll service providers differ from one another, see the Third Party Arrangement Chart on IRS.gov.
Here are some steps employers can take to protect themselves from unscrupulous third-party payers.

• Enroll in the Electronic Federal Tax Payment System and make sure the PSP or RA uses EFTPS to make tax deposits. Available free from the Treasury Department, EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their third-party payer is properly carrying out their tax deposit responsibilities. It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone. To enroll or for more information, call toll-free 800-555-4477or visit www.eftps.gov.

• Refrain from substituting the third-party’s address for the employer’s address. Though employers are allowed to and have the option of making or agreeing to such a change, the IRS recommends that employer’s continue to use their own address as the address on record with the tax agency. Doing so ensures that the employer will continue to receive bills, notices and other account-related correspondence from the IRS. It also gives employers a way to monitor the third-party payer and easily spot any improper diversion of funds.

• Contact the IRS about any bills or notices and do so as soon as possible. This is especially important if it involves a payment that the employer believes was made or should have been made by a third-party payer. Call the number on the bill, write to the IRS office that sent the bill, contact the IRS business tax hotline at 800-829-4933 or visit a local IRS office. See Receiving a Bill from the IRS on IRS.gov for more information.

• For employers who choose to use a reporting agent, be aware of the special rules that apply to RAs. Among other things, reporting agents are generally required to use EFTPS and file payroll tax returns electronically. They are also required to provide employers with a written statement detailing the employer’s responsibilities including a reminder that the employer, not the reporting agent, is still legally required to timely file returns and pay any tax due. This statement must be provided upon entering into a contract with the employer and at least quarterly after that. See Reporting Agents File on IRS.gov for more information.

• Become familiar with the tax due dates that apply to employers, and use the Small Business Tax Calendar to keep track of these key dates.

Good bookkeeping is the key to neutralizing an IRS audit

If you are a small business owner, the best way to protect yourself against an IRS audit is to keep good records in a systematic way. Most of us don’t like the bookkeeping task and would much rather be doing something else, rather than reconciling the business checking account. We know how much money we spent, we know how much money we made, yet we are often told that bookkeeping has to be done anyway!

Well “they” are correct.

Without good bookkeeping, two things can happen. 1) You can lose track of the minor transactions which can add up to be a large transaction, which can immediately overdraw your account and make you believe you have more money than you actually have. Plus, often times clients forget about certain deductions when tax time comes because they didn’t keep good records.

The second reason for good bookkeeping is to put into place a protection in case the IRS has questions. If you pay cash for certain services or items on constant bases, there would be no way to prove this deduction unless you keep good records and can produce these records if the IRS questions your deductions.

Example:

Kenneth is a contractor and each morning he buys each of his workers coffee and a food item at the local Starbucks. On the average there are 6 workers, who work 5 days a week. Kenneth spends $5.00 on each worker. 50 weeks a year, 5 days a week, $5.00 on 6 workers (average) 50 x 5 = 250 days x $5 = $1,250 a year for one employee x 6 =$7,500 a year for food and beverages for his workers.

Kenneth always pays cash at Starbucks, sure he could use a credit card or buy a gift care, but he doesn’t think of that until the IRS sends a CP-2000 (paper audit) asking about another item on the tax return.

Kenneth’s tax professional wants to be able to substantiate each deduction because he doesn’t agree with what the IRS is proposing and ask for a meeting with the IRS.

Kenneth can’t prove his $7,500 write off for food and beverages for his workers. $7500 on Schedule C Line 24b = $3750 (50% of the food and beverage) Kenneth didn’t add the $5 a day he spent on himself, but he should have!

IF, Kenneth had put the $35 a day cost into his QuickBooks entries, he would have had a running proof. The Starbucks owner surely would have written a letter confirming that, 5 days a week, Kenneth and his six guys purchase coffee and one food item each morning. (if he couldn't find his receipts)

There is a reason we recommend QuickBooks for tax clients. Quickbooks Online - Choose the plan that's Best for your Business Today! Try Now FREE for 30 Days! Clients can use Quickbooks Online and always have access to their accounting records without having to do any paper work. If clients have a problem with keeping receipts then we encourage them to Manage your receipts and business cards online.

Regardless of which plan you select it is much easier, then dealing with paper work, which will never organize itself.