With rising healthcare costs and the burden of compliance weighing heavily on all employers, it’s no secret that small businesses are scurrying to find ways to offset these costs and new responsibilities. While finding loopholes is a cat and mouse game that the IRS and small businesses have been playing for years, the IRS is stepping up its game. Loopholes and belts and are getting tighter this year.
You’re Looking for Contractors? So Are They.
Small businesses rely on cost effective contractors to drive success, but a lot of them are misclassifying their workers. Do they fill out a W-4 or a W-9? Employees fill out W-4s and their employer pays regular taxes on their work. Contractors fill out W-9s and are responsible for their own taxes annually. W-4 workers have far less room for non-reporting than do contractors. This tax gap has driven the IRS to seek out misclassified workers. There are a lot of rules/loopholes/policies that they will be looking for, but at the end of the day, if the company is contracting out work simply to not hire full-time employees, they are taking a risk.
Mom and Pops Beware
In a recent Wall Street Journal post “Small Business in IRS Sights” the article actually mentions “mom and pops” businesses as a target for these IRS crackdowns. The types of business and workers that generally speaking can’t reasonably afford to pay accountants or legal fees to defend them are the ones that can expect letters from the IRS asking if their claims are factual.
This tactic is so crippling because the burden of proof falls on the small business/worker, not the IRS. The IRS can send as many letters and audits out as it wishes; the fees, time and resources to fight the claim are the responsibility of the taxpayer. In the end, a law abiding, tax-paying citizen could, in theory, go under fighting a claim that cost the IRS pennies to inquire about. That is money that could have gone toward the success of the business or worker.
We have established that defending your claims, fighting an audit and proving the legality of your tax information can be asked of just about anyone, even those that are well within the law. So how do you make sure that you aren’t an IRS target? The problem is, you can’t. The IRS hasn’t disclosed their method of targeting; they have simply said that they will be sending letters out to those businesses who have reported “unusually low” cash sales. Does this take into account costs? Is this tabulated by industry? Do they have a standard for each type and size of business? No one can really be sure, and that is terrifying for small businesses. There is very little room for a proper defense when you’re not really sure why you’re being questioned in the first place.
Alright small business owners and workers, now that you’re sufficiently scared, here are some tax write-offs that you might not have been aware of. Being prepared, educated and honest really can help your small business as you move forward. These crackdowns might set more than a few businesses back. If you don’t know enough to comfortably file on your own, hire a professional or ask for help. Good luck!