Owning a small business is challenging. Sometimes it may feel like your entire industry is out to get you. Don’t let financial troubles squash your entrepreneurial dreams—there’s no reason a small business can’t have the same quality legal advice as its bigger competitors!
Read on for five financial tips for avoiding an audit and pushing your small business into financial success.
#1 Keep a Healthy Ratio of Employees to Contractors
Small businesses tend to hire freelance and contract workers rather than full-time employees. This has several potential benefits for a budding company:
- Avoid payroll taxes
- Save money on employee benefits, like insurance, pensions, and matching 401K
- Tax deductions
- Lower base income in some circumstances
While this all may seem like a great way to save your small business some money—things can become tricky when the IRS gets involved. Contract workers in particular have a strict set of guidelines that makes them eligible for this type of employment.
A primary example of these restrictions is the fact that contract workers are allowed to make their own schedule. If you have a contract worker coming in 40 hours a week, at a set time every day, you may attract the attention of the IRS and put yourself at risk of an audit.
Employees and contract workers are both valuable assets to your small business. Just make sure to keep a normal balance of the two and follow the rules when it comes to freelance employees.
#2 Actually Work from Home
Many small business owners take advantage of the tax deductions offered to those who work from a home office. However, it’s vital to understand the rules that dictate what a “home office” really is, because this is one of the more common IRS audit triggers. A home office, for tax purposes, must be a separate room in your house, that is dedicated entirely to work (no, your bed doesn’t qualify as a home office).
With COVID-19 pushing many people into working from home, now is a perfect time to adopt the home office lifestyle and allow yourself the tax deduction and the multitude of other savings that come along with it. Just make sure you’re following the guidelines and you should be safe when audit season rolls around.
#3 Avoid Large Deductions
Yes, deductions are a wonderful part of owning your own business. Meals, supplies, and trips can all be deducted if necessary.
However, tax deductions that are disproportionately large for your small business can be a trigger for the IRS and you may be audited. Be smart about your deductions, particularly if you’re making charitable donations—don’t overdo it in comparison to your income.
The charities will still be there once you start making more money!
#4 Be Precise About Your Numbers
While larger businesses are more likely to be audited, that doesn’t mean small businesses can fly under the radar—especially if your numbers aren’t precise.
Even small amounts of money rounded up or down can catch the attention of the IRS and trigger an audit. While a few bucks here and there may not seem like a big deal, they can potentially result in much larger losses if left unchecked.
Don’t get sloppy with your figures. Do the work, and do it right, because paying five dollars now can help you avoid paying five thousand dollars when you get audited.
#5 When in Doubt, Hire Someone
One of the most valuable assets to a business of any size is a thorough accountant. Starting your own company forces you to wear many different hats, so having someone whose main job is to calculate numbers and keep track of receipts is going to be well worth the money it costs to pay them.
We mean pay them an employee, not a contract worker.
As the CEO, you’re not always going to have the time it takes to monitor every penny you make (and spend) but that doesn’t mean someone else can’t. Ditch the stress of wondering if you’re going to be audited every year, and pay someone to be precise, preventative, and proactive with your company’s money.
Avoid the Audit
Whether you’re a creative, a tech wizard, or an inventor, if you build your own company form the ground up, your strong suit is probably not accounting.
But that’s okay! Starting your own business isn’t just for people who know the ins and outs of finance. Taxes can be frustrating, but following these basic tips (and getting some advice from people who do know everything about finances) should help decrease your chances of an audit, and allow you to continue making your dreams come true!