Tax Issues Small Businesses Face

On: January 31, 2024

Small businesses in California are ever important as they help fuel the economy and meet the needs of other businesses and residents throughout. As a small business owner, you are required to comply with all of California’s tax regulations and rules – which can definitely become confusing quickly. 

There are multiple agencies that handle different taxes and within each of those agencies are different rules to follow. A small oversight or mistake on your part could mean you are paying a lot of money in fines and penalties. 

With the assistance of a tax professional, you can ensure that your business remains in compliance with the IRS and all of California’s tax boards at the same time. 

What Types of Tax Issues Do Small Businesses in California Face?

As we mentioned above, there are multiple tax agencies that you, as a California small business owner, need to follow. Unfortunately, even the most experienced business owners find themselves making a mistake or two along the way. 

So, what exactly are some of the mistakes that small businesses make with their taxes?

Underpayment of Taxes 

One of the biggest issues for small businesses is the underpayment of taxes. This is often due to not having a good recordkeeping system in place. What happens most commonly is that the business collects sales tax from customers but then forgets to pass that sales tax over to the state. Therefore, the company is underpaying its taxes and the IRS is not forgiving. 

It is also possible that a small business owner underpays their own income tax. This most commonly happens when the owner thinks that the estimated quarterly tax payment is optional. It is a requirement. You are required to pay the estimated taxes in full too. 

Misclassifying Employees 

Knowing the difference between an employee and an independent contractor is so crucial for business owners. Misclassifying employees happens and is a huge mistake that can cost business owners a lot of money. 

The EDD or Employee Development Department handles the classification of employees and you can bet they will audit you if they think you are misclassifying yours. 

Misclassifying the Business 

All businesses in California must pay a franchise tax to the state. The amount of this tax is determined based on the type of business entity you have. For example, corporations are not responsible for paying this tax, but a limited liability company (LLC) is. 

Failing to pay this franchise tax can land you in some hot water and you will owe quite a bit in fines too. 

What Should I Do If I Am Facing an EDD or FTB Audit?

An EDD audit is not something you want to take lightly. The EDD is known to audit taxpayers when they believe that employees are misclassified or when they believe you failed to submit all payroll taxes. Mistakes are bound to happen at some point, but this does not mean you can get away with it. In fact, you will find yourself up against some hefty fines and consequences. 

An FTB audit occurs when your business owes outstanding taxes. You will find that this audit does not simply disappear and the FTB will come after you for the money. One of the biggest worries about an FTB audit is that the FTB can suspend your business should they not be able to collect the taxes you owe. 

Leading Tax Group Can Help You with Small Business Tax Issues 

If you have found yourself at the center of a tax audit, EDD audit, or FTB audit, it is time to secure counsel and work with a group of experienced IRS tax experts. 

At Leading Tax Group, your tax team is made up of a retired tax attorney, retired IRS auditor, and experienced tax accountant. We know how to handle the EDD, FTB, and IRS, so you are in good hands. 

Don’t try to handle a tax issue on your own and let our team get your business back on track. Call Leading Tax Group today for a free consultation.