With the tax year upon us, it is about time that small business contractors gear-up for it and prepare for next year already.
Only 0.5 percent of federal tax returns filed by small businesses in 2016 were selected for examination, but contractors should take a couple of proactive steps to fully audit-proof their business.
By applying some new technology and updating some everyday business workflows at the start of the new year, a small business contractor can be confident knowing that they have taken the necessary steps to protect their business in case that dreaded IRS notice shows up at their business’ door.
- Invest in the cloud — Small business contractors that have not already invested in cloud-based software are way behind. Transitioning a small business’ bookkeeping and accounting processes to the cloud can provide a significant boost to the entire back office. The cloud allows small businesses to save hours of compliance work as well as provide easy access to the business’ backup documentation and receipts, if the business does get audited.
A powerful cloud-based accounting platform provides your business with a centralized hub of accounting data and there are a myriad of third-party applications, designed specifically for your business, that can be integrated in order to equip your firm with an extremely organized and efficient engine. The ability to instantly access a travel or expense receipt from anywhere, at any time is a powerful luxury to have on your side when justifying a business travel deduction. With the cloud, an organized contracting business will be able to approach a field audit with nothing more than a laptop and internet connection.
- Use a payroll service — One common trigger for correspondence audits is discrepancies between payroll tax withholdings and payments. A credible payroll service provider will be able to establish the correct federal and state deposit schedule and rates, file and pay taxes on time and manage all responsibilities associated with new hires. Most importantly, an experienced payroll professional can resolve the majority of IRS and state notices relatively quickly.
- Require W9’s for independent contractors — If a small business contractor pays $600 or more to an independent worker or non-exempt organization, the business must file Form 1099 with the IRS each year and also distribute a copy to the vendor by Jan. 31 of the following year. To ensure the business is meeting all guidelines, implement an internal policy immediately that prevents any independent worker or vendor from getting paid until you receive a signed copy of their W9, which provides the business with all the non-financial information needed to properly prepare, distribute and file that vendor’s 1099. Essentially, a small business contractor has one month to close out and reconcile annual financials, as well as gather Employer Identification Numbers, Social Security Numbers and legal business addresses for all vendors. Requesting copies of W9’s prior to remitting first payment to each vendor will ensure the business does not miss any 1099-related deadlines.
It is also important that businesses report all income from all sources and analyzes each of the 1099’s received with the business’ existing records for accuracy. The IRS has very concise and complex programs that identify businesses that file a lower income on the return than the cumulative amount of 1099’s issued on its behalf, which will immediately trigger a red-flag. Small business contractors should also update all W9’s each year to ensure clients and customers have the correct information for their records as well.
- Keep Digital Copies of Receipts — Whether the boss treated the workers to a Friday lunch or the business owner needed to pick up a last-minute part at the local supply shop, all travel, meal, entertainment and expense deductions need to be backed-up with actual receipts and proof of business intent. The failure to provide receipts means that these expenses will not be considered deductions and the business is ultimately on the hook for additional tax owed, including penalties and interest. To ease this concern, small business contractors should consider mobile applications that allow workers to quickly snap a photo of the receipt and import the image into the business’ accounting engine.
- Lean on accountants as a trusted advisor — Qualified accountants can act as a business’ biggest fan, as well as its biggest critic. To keep up with certifications and licenses to practice, accountants and bookkeepers must consistently maintain the highest levels of respect for tax laws and regulations. An experienced accountant should voice concern if they feel the business is engaging in suspicious activity or lacking from a compliance standpoint. As the business’ trusted advisor, an accountant needs to be technologically-savvy and forward thinking, so the business can rely on their expertise and equip a contractor’s business with all the tools and applications needed to work smarter and prevent red flags that may trigger an audit.
While a small business contractor will not receive any financial compensation for being a responsible and compliant taxpayer, there are many advantages to audit-proofing a contracting business.
By applying the steps above, a business will exponentially enhance the methodologies and internal controls of the back office and shave-off hours of valuable time spent on bookkeeping and compliance work each month, never mind the peace-of-mind knowing the business is prepped and ready in case of that dreaded audit.
