Nothing beats the satisfaction of ditching the 9-5 grind in favor of starting your own business. You’ll have a direct impact on the success of your product or service, and you might even be able to achieve a better work-life balance in the process.
Unfortunately, small business are at higher risk of an IRS audit. Facing an audit is understandably stressful, especially for a rookie business owner. While no one can ever guarantee that your business will be audit-proof, here are some strategies for getting off to a good start with all the necessary records and paperwork; if the IRS should ever come calling, you’ll be prepared.
Keep Accurate Employee Records
This is especially true for payroll records if you choose to hire employees. Each employee will need to complete a W4 form, I-9 form, and any additional company-based forms you provide. Verify the accuracy of all information your employees provide, including address and social security number.
If you hire an independent contractor, they will need to complete a W9 form when they begin working with you. They must complete all required information, including their Tax ID Number (TIN) or social security number.
Hire A Numbers Guru
While there is plenty of DIY bookkeeping software available to small business owners, play it safe and hire an experienced bookkeeper or payroll service if you have employees and/or independent contractors.
They will be able to file quarterly payroll forms, and will deduct the correct amount from each person’s payroll each pay period. Miscalculating these figures is no joke; you may end up owing the IRS and state tax board a fair chunk of change if payroll taxes are miscalculated or under-withheld.
Sure, a numbers guru is an extra expense, but their services are also an investment in the long-term well-being of your business.
Keep Track Of All Expenses and Income
Even if you are a sole proprietor, it is imperative that you keep accurate expense records. Save any and all receipts and keep them organized throughout the year. You will need to be able to substantiate your expenses to the IRS should you ever be audited.
Keep copies of credit card statements, bank statements, receipts and any other expense documentation.
The same goes for income; even if you go it alone, you must keep accurate income records from all sources: credit card, cash, check, electronic transfer, third-party payment services.
If you have a bookkeeper, he or she will able able to track monthly income and expenses for you via bookkeeping software or app.
Hire a Tax Pro
While a bookkeeper can keep track of income and expenses, you’ll need a tax pro by your side come tax filing day. Filing a business return is more complex than a standard 1040, and your tax pro will be able to advise you further on sound tax strategies for your business. A tax pro can also negotiate with the IRS on your behalf should you ever face an audit or other tax matter.
Starting a small business can be challenging, risky but ultimately satisfying. By keeping accurate payroll, income/expense and tax records from the outset, you’re setting a healthy precedent for your business. While there are no guarantees your business will never face an audit, you’ll be in good stead with accurate records and a tax advisor by your side.