Starting and running your own business can be an exciting time — gathering a talented team to pursue your professional goals can be incredibly fulfilling. However, there are many pitfalls for a new business. An IRS audit can bring your new company to a standstill and devastate your dreams, but simple steps can help you prevent that from happening. Here are five tips to help you avoid being audited.
1. Keep proper records
It may seem like a simple task, but properly filing and tracking all of the paperwork over the course of a year can be a difficult task to keep up with. Filing 1099s and other paperwork for each employee and expense can quickly pile up, especially when you are tracking your personal taxes as well. Develop a sound and organized method of organizing and filing your paperwork as soon as possible. A small business accounting tool like QuickBooks can help you keep track of all your records in an electronic format. Doing so will make filing your taxes easier for you or your tax service and will also help you should your company be audited.
2. Outsource payroll
It can be tempting to avoid fulfilling payroll taxes if cash flow for your company has been slow recently. While this would free up some assets to deal with other expenses, this is an easy way to bring the IRS to your business’s door. Outsourcing your payroll to a service such as Paycor will remove this temptation, as well as ensure all of your payroll paperwork and taxes are filed correctly.
3. Classify workers properly
Being sure you’ve classified your employees in the right capacity will help you avoid an audit. You can avoid some taxes by classifying someone as an independent contract employee, but if they don’t fit that definition you can be fined for your portion of income and social security taxes you neglected to pay. Being honest with yourself and the IRS about each team member’s role when filing taxes is far better in the long run than avoiding your business’s share of taxes.
4. Separate personal and professional
It’s easy to turn a two-day business trip to Florida into a weeklong family vacation, but beware mixing your personal and professional expenses. Your family’s travel expenses aren’t deductible and you can only deduct 50 percent of your food or entertainment costs while traveling for work. Similarly, deducting expensive personal legal issues such as the cost of a divorce to protect your business will draw the attention of the IRS. Keeping your personal and professional expenses separate will minimize any issues of this nature and keep your business running.
5. Check for mistakes
Electronic filing has helped to make the tax process smooth and painless for many workers and business owners. However, a simple mistake like typing an extra zero can make $100,000 become $1 million. Double and triple checking each form before you hit submit will minimize your risks. For those who want to outsource and avoid the headache, tax-filing services like H&R Block can maximize your deductions and file your taxes for you. They’ll appreciate your neatly filed records too.
Navigating the tax code can be a very complex and difficult process. Making sure to take advantage of automated services and keeping proper records will minimize your risk of an IRS audit, so you can stop worrying about the government knocking on your door and focus on growing your business.