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Tax Compliance Tips for Small Businesses

Tax compliance is a critical aspect of running a successful business. Ensuring your company adheres to tax laws and regulations helps you avoid penalties and legal issues, allowing you to focus on growth and profitability. This article shares tips on tax compliance in an attempt to help you stay in good standing with the IRS. With the support of C.E. Thorn, CPA, PLLC in Raleigh, NC, you can confidently navigate the complexities of tax compliance. 

Understanding Tax Compliance

Tax compliance involves adhering to the tax-related laws and regulations set forth by federal, state, and local governments. It encompasses timely and accurate reporting of income, expenses, and other financial information and paying the correct taxes owed. Failure to comply with tax regulations can result in penalties, interest charges, and legal consequences. 

Critical Components of Tax Compliance

  • Accurate Record-Keeping: Maintaining detailed and accurate financial records is fundamental to tax compliance. This includes tracking all income, expenses, and transactions. Proper documentation guarantees that you can substantiate your tax filings if audited by the IRS. 
  • Timely Filing of Tax Returns: To avoid late filing penalties, you must submit your tax returns by the due date. This includes federal, state, and local tax returns. For businesses, this may also include quarterly estimated tax payments. 
  • Correct Calculation of Taxes Owed: Accurately calculating the amount owed involves understanding the applicable tax rates, deductions, and credits. Errors in tax calculations can lead to underpayment or overpayment of taxes.
  • Compliance with Payroll Taxes: Employers must withhold, report, and remit payroll taxes, including federal income tax, Social Security, and Medicare taxes. Ensuring compliance with payroll tax regulations is vital to avoid penalties and interest charges. 

Common Tax Compliance Challenges

  • Complex Tax Codes: The U.S. tax code is complex and frequently changes, making it challenging for business owners to stay updated and compliant. 
  • Misclassification of Employees: Misclassifying employees as independent contractors can result in significant penalties. It’s vital to understand the criteria for employee classification. 
  • Deduction Errors: Incorrectly claiming deductions or failing to document them properly can lead to audits and penalties. Confirm that all deductions are legitimate and well-documented. 
  • Failure to File on Time: Missing tax deadlines can result in late filing penalties and interest charges. Keeping track of important tax dates and deadlines is necessary for compliance. 

Strategies for Ensuring Tax Compliance

Implementing effective strategies can help your business maintain tax compliance and avoid potential issues with the IRS. Here are some strategies to consider:

  1. Automate Record-Keeping: Utilize accounting software to automate the tracking of income, expenses, and financial transactions. This reduces the risk of errors and ensures accurate record-keeping. 
  2. Stay Informed on Tax Laws: Regularly review updates to tax laws and regulations that affect your business. To stay informed, subscribe to tax newsletters, attend webinars, and consult with a tax professional. 
  3. Hire a Qualified CPA: Partnering with a CPA, like C.E. Thorn, CPA, PLLC can provide guidance on tax compliance. A CPA can help you navigate complex tax issues and ensure accurate filings. 
  4. Conduct Regular Tax Reviews: Periodically review your financial records and tax filings to identify potential compliance issues. Regular reviews can help you catch and correct errors before they become significant problems. 

Federal Tax Compliance

Navigating federal tax compliance is crucial for any business to avoid penalties and ensure smooth operations. Below is some essential federal tax information to know to help your business stay compliant with federal tax laws in 2024:

  • Corporate Tax Rate: The corporate tax rate remains at 21%. To avoid underpayment penalties, ensure accurate taxable income calculation. 
  • Standard Deduction: For 2024, the standard deduction is $14,600 for single filers and $26,200 for married couples filing jointly. This impacts how businesses and self-employed individuals calculate their taxable income. 
  • Estimated Tax Payments: Businesses and self-employed individuals expecting to owe $1,000 or more in taxes must make quarterly estimated tax payments to avoid penalties and interest. 
  • Qualified Business Income Deduction: Eligible businesses can deduct up to 20% of their qualified business income. Ensure you understand if your business qualifies and how to claim this deduction. 
  • Payroll Taxes: Employers must withhold and pay federal income tax, Social Security tax (up to $160,200), and Medicare tax (1.45%, with an additional 0.9% for high earners). 

North Carolina Tax Compliance 

Knowing the state tax compliance regulations is vital for businesses operating in North Carolina. Staying updated with the latest tax laws ensures smooth operations and helps avoid penalties. 

  • State Corporate Tax Rate: North Carolina's corporate tax rate remains at 2.5%, making it one of the most competitive rates in the country. Accurately calculating state taxable income is essential to taking advantage of this rate. 
  • Sales and Use Tax: North Carolina has a base state sales tax rate of 4.75%, with additional local rates that can bring the total to between 6.75% and 7.5%. Businesses must collect and remit sales tax on all taxable sales and services. 
  • Franchise Tax: The state imposes a franchise tax at $1.50 per $1,000 of the larger of a corporation’s NC apportioned net worth or 55% of its appraised property value, with a minimum tax of $200. 
  • Withholding Tax: Employers must withhold state income tax from employees' wages at a flat rate of 5.25%. Ensuring accurate and timely withholding is essential to compliance. 
  • Property Tax: Businesses must pay property taxes on real and personal property, with rates varying by county and municipality. Accurate filing and timely payments are essential to avoid penalties.

The Role of a CPA in Tax Compliance

A Certified Public Accountant (CPA) is paramount in helping businesses maintain tax compliance. Here’s how a CPA can assist you:

  • Expert Tax Advice: A CPA advises on tax laws and regulations, helping you understand your tax obligations and identify potential deductions and credits.
  • Accurate Tax Preparation: A CPA ensures that your tax returns are accurately prepared and filed on time. They can also help you with complex tax issues like multi-state taxation and international tax compliance.
  • Audit Support: If the IRS audits your business, a CPA can represent you and provide the necessary documentation and support to address any issues that may arise. 
  • Ongoing Tax Planning: A CPA offers ongoing tax planning services to help you minimize your tax liability and stay compliant throughout the year. This includes advice on business structure, retirement planning, and other tax-saving strategies.

Common Mistakes to Avoid in Tax Compliance

Avoiding common tax compliance mistakes can help you stay on the right side of the IRS and prevent costly penalties. Here are some mistakes to watch out for:

  • Underreporting income: Failing to report all sources of income can lead to severe penalties. Confirm you accurately report all income, including cash transactions and side gigs. 
  • Overlooking State and Local Taxes: Don’t neglect state and local tax obligations. Confirm that you comply with all state and local tax requirements, including sales and property taxes. 
  • Ignoring Estimated Tax Payments: Businesses and self-employed individuals must make timely estimated tax payments. Failure to pay the estimated taxes can result in penalties and interest charges. 
  • Not Keeping Up with Tax Law Changes: Tax laws frequently change, and staying informed is essential for compliance. Review updates to tax laws regularly and adjust your tax strategies accordingly. 

Contact Us for Assistance with Small Business Tax Compliance 

Navigating the complexities of tax compliance can be challenging. At C.E. Thorn, CPA, PLLC, we assist small business owners in Raleigh, NC, with maintaining tax compliance. Our small business accounting, tax preparation, and bookkeeping services ensure you meet all tax obligations accurately and on time. Call us at  919-420-0092 or fill out the form below for more information about our services.