When it comes to recording and managing their finances and reporting tax obligations, many small businesses owners are surprisingly ill-equipped and unprepared, and this oversight can end up costing them thousands of dollars.
In a recent survey conducted by internet domain registrar and web hosting company, Godaddy.com, 600 small business owners were asked to describe how they manage their finances and how those habits are effecting their tax reporting. The survey revealed that over half of respondents still use manual processes, such as a spreadsheet or paper files, to record their income and expenses, and close to 40% set aside several days in order to complete their tax return.
Here are a few other interesting small business tax facts from that study:
- Almost half (46 percent) of small business owners reported they do not work with an accountant.
- Of those small business owners who do work with an accountant, 47 percent see their accountant once a year at tax time or only when they have a question or need help.
- 32 percent of small business owners do not set aside money throughout the year to pay income taxes.
- 12 percent of small business owners have no idea how much they will owe in income taxes, while 74 percent reported that they usually know the “ballpark” of what they owe, while just 15 percent know exactly how much they owe.
These are some pretty shocking statistics, and it seems to corroborate reports that have come from a variety of other sources, including the IRS and the National Small Business Association. Here are a few eye-opening statistics about small business tax habits from around the web:
- According to the 2014 Small Business Taxation Survey from The National Small Business Association (NSBA), some business owners spend up to three weeks a year dealing with payroll taxes. Eleven percent of those surveyed spend over 10 hours every month working on payroll taxes, while 43 percent spend between three and 10 hours a month. The survey also found that forty percent of small business owners spend 80 hours preparing their Federal income taxes.
- According to the IRS, 106,776 small businesses were audited last year. These were these were non-farm businesses that reported less than $25,000 in gross receipts and didn’t claim the earned income tax credit. Auditors demanded on average $5,500 from these businesses
- There are more than 15,000 tax codes in the United States and from 2001 to 2012, there was an average of one change a day to the tax code.
- The IRS also extended $4.5 billion in penalties related to payroll taxes.
- One of the biggest triggers of an IRS audit is misclassifying employees as independent contractors.
- A third of small businesses get fined for doing payroll incorrectly, typically do to unintentional mistakes.
If you are running a small business, take these numbers to heart. As we head into the middle of the summer, you have a lot of time to make some changes to the way you manage your finances that can potentially save your business a lot of money down the road. If you can, hire an accountant or a bookkeeper, or at the very least use accounting software, such as Turbocash, GnuCash, or Quickbooks, to keep track of your cash flow. You’ll be glad you did come tax time.