Top 4 Tax Compliance Issues for Companies

You probably decided to run your own business for various reasons, such as independence or the ability to offer something valuable to your community; However, chances are, an opportunity to learn about the tax code was nowhere on your list.  

Filing taxes and complying with tax rules are critical parts of every business owner’s job. It may be a pain, but staying on top of tax issues doesn’t have to be overwhelming. In fact, it will benefit you in the long run by minimizing complications and penalties. 

Below, our Colorado business and taxation lawyers highlight four of the most common tax compliance issues local businesses face and how to avoid or resolve them. 

1. Underpayment of Taxes

Here, underpayment refers to sales tax your business collects but fails to properly pass on to the state. Underpayments can be accidental or deliberate. Common reasons underpayments occur relate to: 

• The nature of your business transactions (many small businesses deal in cash)
• Not reporting transactions to the IRS, State or locality;
• Underestimation of tax payments
• The complexity of the tax code
• In Colorado, different tax rates in different jurisdictions

Underpayments can also relate to employer withholding taxes, estimated personal taxes due, or personal or real property taxes. Underpaying your taxes can cause higher end-of-year taxes, various penalties, and other inconveniences that you could avoid with the help of a qualified legal or tax advisor. 

2. Business Organization/Structure

Colorado law offers several different options for forming a business. Examples include sole proprietorship, general partnership, limited partnerships (LP), limited liability partnership (LLP), limited liability company (LLC), S-corporations, and more.   

Business owners sometimes choose the wrong structure when they start out, causing them to pay more taxes than they should. Talk to a qualified business organization attorney if you’re concerned that your company may not be organized efficiently. Changing to a different business form is possible, but it must be done carefully.   

3. Cash vs. Accrual Accounting Method

It may seem mundane, but your choice of accounting method affects how you file a tax return. Once you choose a method, you usually need to keep using the same method going forward unless the IRS approves a change.  

The difference between cash-basis and accrual-basis accounting has to do with timing. For cash accounting, you record income and expenses when money is received or spent. For accrual accounting, you report both when they are incurred, regardless of when the money comes in or goes out. 

4. Independent Contractors

The difference between independent contractors and employees is one of the stickiest distinctions in employment law. You might view certain people as contractors, but the IRS or state might see them as employees. This can have a big impact. 

For example, your business does not have to withhold employment taxes from independent contractors, but usually, you must still track how much you pay them and report it annually on a Form 1099 (if you paid the person $600 or more). If the IRS views your “contractor” as an employee, it will demand that you pay those payroll withholdings at tax time.  

Contact a Denver-Area Business and Tax Attorney for Advice

The lawyers of Hackstaff Snow Atkinson & Griess, LLC, guide Colorado business owners through all aspects of tax filing and compliance with federal, state and local taxes.  

Call us at 303-534-4317 or send us a message to schedule a consultation at our Greenwood Village office. We also offer phone and video conferences.