
4 Common Tax Compliance Issues for Small Businesses
For small businesses, understanding tax compliance can often feel like navigating a complicated maze. This article sheds light on the most pressing issues, offering expert advice on topics like improper expense claims, worker classification, and the complexities of multi-state tax laws. With insights from industry professionals, business owners will be equipped to face tax challenges head-on.
Prevent Unwarranted Expense Claims
Clarify Worker Relationships
Perform Worker Classification Reviews
Stay on Top of Multistate Tax Requirements
Prevent Fraudulent Expense Claims
Fraudulent and incorrect expense claims are among small businesses' most common and costly compliance issues. Such as employees or directors mistakenly or fraudulently claiming disallowed expenses. One example is an employee claiming a business expense such as a personal training course that is not business-related and isn't tax-deductible. Still, the bookkeeper doesn't check it and unknowingly includes it as deductible.
Another common issue is a Director claiming personal expenses, such as a family trip to Disneyland, as business travel. The IRS considers this fraudulent and disallows it. A third example is an employee inflating an expense—e.g., purchasing a $250 laptop and claiming $500. The business, trusting the employee, records the higher amount. Lastly, a senior manager might claim a dinner with family as a business expense without proof of receipt or authorization by a manager, which is not deductible or fraudulent. These issues often arise when receipts and invoices aren't correctly verified or authorized.
To reduce risks, businesses should implement robust expense policies and more. For example:
Write clear guidelines on allowable and non-allowable expenses for equipment, travel, meals, hotels, etc.
Require copy receipts or invoices for any expense over $50.
Ensure senior management authorizes all claims above $100 before payment.
Train bookkeeping staff to understand IRS rules on allowable employee expenses.
Digital tools like Xero bookkeeping software offer real-time expense tracking and integrations with apps like Hubdoc or Dext for receipt and invoice capture. These enable employees to upload photos or forward invoices via email, creating a clear audit trail. Businesses might also issue corporate credit cards such as Barclaycard or Stripe to limit and track the spending of specific staff members.
Businesses can significantly reduce the risk of fraudulent claims with a sound expense policy, cloud-based accounting software tracking, and knowledgeable staff.
Where Accountants and CPAs are key to ensuring compliance is with IRS rules. The IRS imposes severe penalties for errors, including "accuracy-related penalties (IRC Section 6662), civil fraud penalties (IRC Section 6663), interest on underpayment, and even criminal charges."
Be careful and safe: Hire a qualified tax accountant or CPA who knows their stuff.
Buhir Rafiq, CPA - Accounting Practice M.D, Total Books Accountants Ltd
Review Worker Relationships
Accountants facilitate this process by reviewing worker relationships using the three control tests: behavioral control, financial control, and relationship type. They scrutinize work performance methods, business aspect control, and review written contracts and benefits. Their expertise assures proper documentation in compliance with state and federal regulations.
But the stakes are high, as a misclassification can lead to significantly high back taxes, penalties, and interest charges. Accountants protect businesses by creating clear guidelines, reviewing current classifications, and getting all tax obligations paid on time with accuracy. They inform companies of what is required to withhold and report correctly for each category of worker so they can stay in compliance and avoid costly penalties from misclassification.
Taryn Pumphrey, President, Ledger Lift
Conduct Worker Classification Audits
One of the most common tax compliance issues for small businesses is misclassifying workers as independent contractors instead of employees. This mistake can lead to significant penalties if the IRS determines that an employee was improperly classified, as it affects payroll taxes, benefits, and legal obligations.
Accountants can help by conducting a worker classification audit and educating business owners on the IRS's criteria for independent contractors versus employees. They can also assist in setting up proper payroll systems to ensure that taxes are withheld and reported correctly. Proactive planning and regular reviews are key to staying compliant and avoiding costly mistakes.
Matt Odgers, Attorney, Odgers Law Group
Manage Multistate Tax Regulations
For businesses like ours, operating across states like Missouri and Arkansas, a common tax issue is managing different state-specific regulations. Accountants help by ensuring accurate filings, tracking changes in tax laws, and minimizing liabilities, making mult-istate compliance much easier and avoiding costly penalties.
Jonas Duckett, Founder, Store-It Quick
PassCash Accounting System for Businesses in the Caribbean
As the founder of PassCash, I understand the challenges small businesses face when managing their finances. That’s why we developed our PassCash Accounting System, specifically designed to support businesses and accountants in the Caribbean. Our platform offers seamless integrations for expense tracking, invoicing, payroll management, and tax compliance—helping businesses stay on top of financial obligations with ease.
With real-time updates and user-friendly tools, the PassCash Accounting System empowers businesses to streamline their operations, reduce errors, and improve overall financial management. Whether you're a small business owner or an accountant, PassCash ensures that managing tax compliance and financial records is simple, secure, and compliant with local regulations.
Founder & CEO, PassCash