Avoid a Tax Audit With Fair Compensation
Are paying yourself enough? Can you afford to pay yourself a wage or compensation fair to your industry? Must you take a paycheck or can you take a draw? Why not just write yourself a check? It’s your business, isn’t it?
When it comes to auditing your business, the IRS wants answers! Do you have the right answer? Do you know what the right answer is? Are you totally prepared for an IRS Tax Audit?
Let me help you. I used to be your worst nightmare. Now I am on your side. I am not helping you cheat the IRS, but I want to help you beat the IRS. We are not bending or breaking any rules. I am just helping you know those rules so you can do the right thing, pay your lowest legal tax AND stay on the right side of the Internal Revenue Service.
First you have to determine, identify and realize what kind of business entity do you have?
Are you an entrepreneur in business for yourself? Do you file a Schedule C as one of the forms with your 1040 Individual income tax return? If you file a schedule C you DO NOT take a paycheck. You take a draw. There is no tax withholding from a draw. You pay your income taxes and self-employment taxes by making quarterly estimated tax payments. If you don’t pay in enough during the year you may have a balance due the IRS when you file your tax return the following year. If you owe more than $1000 with that return you could also owe penalties and interest.
Are you a corporation or an LLC electing to be taxed as a corporation? If this is you, you file a form 1120 or 1120S. And now you DO NOT take a draw, you pay yourself a wage or take a salary. As a business entity, you will have an entity identification number or EIN. This number is like the social security number for the business. And this number is the number that also goes on your quarterly employment tax returns.
How much wage or salary can your business afford to pay you? You can’t take a check when the money isn’t there to take. If your business is healthy, then you must take a fair wage. How does your paycheck compare to others in your same industry? Are you calculating your withholding properly?
So many questions! Are there answers? Yes, but you definitely want a consultation with a reputable advisor to help you with these questions.
Are you paying those withheld taxes to the IRS as often as your are required? Some businesses with less than $2500 required payment can make this payment with their quarterly report. Others have a larger liability and make their deposit electronically to the IRS every month. If you have many employees and a larger payroll, your company will make their deposits more often than monthly. And you’ll have staff to help you meet those requirements.
If you have a money crunch and think you can keep those payroll deposits until you feel better able to pay, you are FLIRTING WITH TAX DISASTER! The IRS will treat you as if you are stealing from your employees. The money you withhold from their paychecks is THEIR money. Those employees are trusting you to pay that money to the IRS on their behalf. These withheld taxes are called “Trust Fund Taxes” by the IRS. It is NOT your money to keep!
One sure way to lose your business is to push that envelope. Have you ever seen the fattest chain with the biggest padlock wrapped through the handles of a business keeping those doors from opening? I have. Not even a Houdini could break those bonds! And the only way you’re going to unlock that padlock is to pay those trust fund taxes.
Okay, so lets get back to taking a fair paycheck for your industry. How much do other people in your line of work make? What are the industry standards? Does your business have the cash to pay it’s suppliers and pay you too? Are you trying to minimize your employer tax responsibilities and just take a check without withholding?
I caution you to do the right thing. Not for the government. Not for the IRS. But do the right thing for YOURSELF!
Did I tell you anything you didn’t already know? Did I remind you of things you did know but were hoping nobody else would remember either? IRS has a memory as long as an elephant’s. They make detailed notes. They never forget. And while their agents may be human just like you and me, when you are facing an “adjustment” by an IRS Agent, he or she can seem to you as big and mean as an elephant. And their Revenue Agent’s Report can seem as loud as a trumpeting elephant.
To your lowest legal tax. Many Happy Return$,
Nellie Williams, EA