Business Reflections Podcast Episode #40 - Business Tax Debt Tips with D. Hart Accounting
Episode Transcript
Meredith Matics: Welcome to Business Reflections with your host Meredith Matics, and we are here to reflect on the business topics that are affecting you today and how you can better run your business. Today, I have Deltrease Hart-Anderson of D. Hart Accounting, and yes, I'm so excited to have another accounting person on. Welcome back to another never ending year of taxes, Deltrease.
Deltrease Hart-Anderson: Thank you so much. And you said it perfectly, it did not end. It doesn't end.
Meredith Matics: Last year did not end at all. And now, they're already pushing back or have already pushed back the deadlines for this year. I feel like we're going to have another never ending year of taxes
Deltrease Hart-Anderson: Yeah. Don't want to even speak on it.
Meredith Matics: Well, what led you to even starting your accounting firm.
Deltrease Hart-Anderson: I'm an accountant by trade. I have a degree in accounting, both my undergrad and grad degrees are in accounting. When I was an undergrad, there was a speaker from the IRS wanting a second to fourth year accounting students to volunteer for the Vita program, the volunteer income tax assistance program. I fell in love with taxes like right then and there. I worked the Vita program. I'm from a small town and they put me in the small town. I had my own Vita site, which was exciting. And this was back in the days where you were handwriting taxes.
Yeah. So I was paper filing taxes, which again, I love. Fast forward, graduated from college and got into corporate America. I worked for H&R Block part-time while I was in corporate America, and I prepared taxes for them during tax season. About two or three years into me preparing taxes for H&R Block. I started teaching. I was an instructor and tax preparer for about 10 seasons.
Meredith Matics: Wow. Teaching's gotta be the harder part, I would think. Because you're going to get so many obscure questions that you're like, man, I never thought about that one. Or maybe you had!
Deltrease Hart-Anderson: It does keep you on your toes when you're teaching, because you're right. If you have inquisitive minds, they're going to come up with all sorts of things so you're right.
Meredith Matics: You wanted to come on and talk to us a little bit about dealing with tax debt. People know what debt is, but what is it to have tax debt as a business?
Deltrease Hart-Anderson: As a business or individual, because sometimes when you have business tax debt, it will bleed or can bleed over into the personal side. When we talk about having tax debt for a business, it could be business, income taxes, business payroll taxes. It could be business sales taxes. So owing some government entity taxes and that government entity will be very aggressive when trying to collect their money.
Meredith Matics: What are the common mistakes that even lead to having tax debt? I mean, it doesn't start overnight. You don't just wake up start a business and have instant tax debt. Talk to me about like, what are the mistakes that small business owners are making and how do they get there?
Deltrease Hart-Anderson: Yeah, so that's a great question. There are many different paths and most every tax problem with small business owners really stem from not having the best record keeping or not having record keeping at all.
So no one is keeping up with the books or someone may be keeping up with the books a little bit, but not really. Or, the business owners waiting to the last minute, like come tax time and now they're trying to rush and get their books completed so that they could prepare a tax return. All of those things feed into how a business owner gets into tax trouble, because what happens is they get a surprise at the end of the year.
Oh my gosh. I did not realize I made this much money. Oh my God. I didn't realize that my profit was this much, I'm in the wrong business or a tax entity. So now I owe all this money and to top it all off, I do not have this money anymore. The money has gone.
Meredith Matics: Right. We could back it up and talk even more specifically about you mentioned there are different tax entities. I think a lot of us think of the income tax and yes, we get surprised if we haven't kept our books but there's also that element of the taxes that we have to hold on to, or that go into our liability accounts that allow people don't think of and payroll tax and or sales tax. How do people fall into trouble with those?
Deltrease Hart-Anderson: Just like you were saying, people will start spending and not realize, okay. Especially, we'll start with a payroll tax. Most of that money isn't your money in the first place? That money is your employee's money. So you have paid payroll. Your payroll could have been $10,000 for the week or biweekly of that $10,000, you are not giving your employees a whole $10,000. You're giving them 10,000 less federal income taxes, less state income taxes. If you're in a state that has an income tax less social security and Medicare, sometimes local taxes as well.
All of that money that you are withholding from your employees, you are supposed to turn over to the IRS in any state locality or the state department of revenue FTB. It depends on where whatever your state is. When you don't turn over that money and that money does look good.
I have staff as well, so that money does look good in my account, but that money is not my money. That's not the business owner's money. That money belongs to the IRS and the state entities. People look at that money and instead of paying it right away, which is the best way to do it because out of sight, out of mind, right?
Instead of paying it right away, they might say, oh, I have some time I will pay it at the end of the quarter, when I file my return, which all businesses don't get that option. They may say, oh, I'll pay it next week. Well, next week something happens. Your HVAC goes out your building floods. You have a personal issue so now the payroll taxes have been spent on something other than payroll taxes. The IRS is not going to come after you like immediately 30 days afterwards. If you don't pay your utility bill, then 30 days from now, your lights will be cut off, but the IRS waits and waits and waits, and you may not receive a notice for a year.
You may not receive a notice for a year and a half. And especially with COVID, you might not receive one for two years. You never know! But because you haven't received that cutoff notice or pay up notice if you will, then it's out of sight out of mind. And that brings problems because you didn't have it two weeks ago. In two weeks after you've paid payroll, you're certainly not going to have it or potentially not have it a year from now. And that's just how things kind of spiral.
Meredith Matics: Yeah. I think a lot of business owners think they understand that they have taxes to pay, but to realize that it isn't always. There's like some payroll softwares that take it out right then and there. Mine does personally because I'm like, get it out of my sight. I don't want to touch it, but not everybody utilizes those. We have to then think about these are what people may be familiar with hearing is quarterly filings. That means that it's only four times a year that the entities or government entities are going to come asking for those amounts. If you haven't set that aside, now you owe that whole amount. All of it, the last three months.
Deltrease Hart-Anderson: Yes, right. It doesn't feel good. It's easier to come up with a quarter, but it's not easy to come up with four quarters, especially as a small business owner.
Meredith Matics: Yeah, and then the same goes with sales tax. I remember working at a company and doing their books. The sales tax, that was just that money that you collected on behalf of the goverment. I remember the owners being like, look at all this money here and it's like, that's not our money. They're going to ask for it back in a little bit. You're just holding it for them.
Deltrease Hart-Anderson: Here's the thing. The states are more aggressive than the IRS. You may receive a letter from the state immediately or within a 30 day timeframe, but you're not going to receive a letter from the IRS in the 30 day timeframe. If you miss one estimated tax payment, or if you miss 1941 payment or payroll tax payment.
Meredith Matics: What we didn't mention, or we didn't talk about with doesn't the IRS have seven years to come after you or come talk to you about anything?
Deltrease Hart-Anderson: Well, actually it just, all depends. If the IRS feels that something is criminal. Then the IRS can come after you forever. When you don't file your tax return and you don't pay those payroll taxes, that can become criminal. If there's a fraudulent return, they can come at you forever. So, yeah. That seven years is just, it all depends.
Meredith Matics: Yeah. I think it's hard for a lot of people to think, well, I need the money today. I can figure it out tomorrow, but tomorrow brings new problems and then same with next week and next month and next year. I used to do payroll for a company who I remember there was one of the employees and she had several not so great years. So she didn't file her taxes and didn't talk to the IRS and then started doing really well at the company that we were working at and was making a decent wage and was really getting herself out of credit card debt and getting herself on her own feet. And then here comes the garnished wages. And she was like, but that was six years ago that I didn't pay my taxes. I never thought I would have money to pay my taxes. It was like now that you do, the IRS wants that and more.
Deltrease Hart-Anderson: And more, and sometimes especially within a five or six year period, your tax liability could double. And not the liability, but the penalties and interest can add up to as much or more as the original liability itself. And that's what I see a lot, because I spend a lot of my time negotiating on the phone with the IRS and different state agencies when it comes to payroll taxes. Because just like you say, For whatever reason something comes up and that payroll taxes and paid, and then it gets pushed down the road until something happens. A bank levy, a lien on a property. Sometimes people are like, oh, it doesn't matter about a lien, but now they want a house or they want to refinance their building. So something happens and now they have to address the problem. It's harder to address.
Another thing with payroll tax issues I've seen is when small business owners make the mistake of misclassifying employees and they classify them as independent contractors that opens up another can of worms.
Meredith Matics: In California, starting in 2020, they redid the rules for classifying independent contractors and made it a lot stricter than the federal rules. And man, that's throwing a wrench in a lot of people.
Deltrease Hart-Anderson: Yes. Even though the IRS has their own Bisa 20 checkpoint 20 questions to determine if you are an independent contractor versus employee, they will accept what the state says. So if the state has determined that that worker is an independent contractor, then fine, the IRS will accept that.
But if the state says, nope, this worker is an employee. The IRS will say, okay, it's an employee. Now employers, this is what you're going to have to do. It's not a good situation to be in because now you're not only paying back the federal income taxes that should have, and they really don't look at the federal income tax or state income taxes withheld in these situations.
But they definitely look at the FICA that Social Security and Medicare that should have been paid on those employees. Most cases end up having to pay your portion as the employer, as well as the employees portion. Because you can't really go back on those workers and say, oh, I messed up and now I want you to pay this money.
Meredith Matics: I think that those amounts are almost set. And isn't it 6% on each end?
Deltrease Hart-Anderson: It's 7.65% total. So 6.2% for social security and 1.45% for Medicare.
Meredith Matics: Let's say you paid somebody $30,000 for the year. How much would they be elbowing in taxes now that they could come back for the misclassification for?
Deltrease Hart-Anderson: Okay. So 30 times 7.65% is $2002.95. That's not the match so if the employer has to pay both, we're talking about $4,590, so almost $4,600.
Meredith Matics: Wow. So you could get very close to having to pay even half of the wage in fees.
Deltrease Hart-Anderson: Especially depending on how far behind you are. If you have payroll taxes from 2016 and the IRS catches up with you in 2021, they go back and assess penalties and interest for all of those years.
Meredith Matics: Right. Well, so this kind of sounds like a lot of scary stuff. So let's talk about how do we prevent this. How do we make sure that we're not getting ourselves into tax troubles?
Deltrease Hart-Anderson: I tell everyone, if you can not do it yourself, then please just hire someone. there are programs out there, I don't want to name any payroll software programs over the other. But there are different small business payroll programs that you can kind of set it and forget it.
And it all depends on how large your staff is. Right. If you have a larger staff, then you may want to hire someone internally to handle payroll, or you may want to hire an external payroll company or an, an accountant, a lot of small business accountants do payroll. And then I know as for me, because my focus is more getting people out of tax trouble.
I refer my payroll out to one of two companies depending on the size of the company that I am helping. So there are all sorts of ways you could do it yourself, or you can get it done for you, but just get it done. You brought up a good point Meredith earlier, just go ahead, when you are processing payroll, just let whatever company you're dealing with, go ahead and just let them take out those payroll taxes. So it's out of sight out of mind, you don't have to think about it.
Meredith Matics: And I think that a lot more payroll companies that you utilize online, I mean, there's a lot of automation and technology that's gone into HR in the last five to 10 years.
And there's some amazing programs out there for all different sizes of businesses. I mean, we utilize one, but it doesn't make it any better than anybody else's. But if you can find one that takes out your quarterly taxes at the time of payroll, that is a huge benefit. I mean, just get it out of sight, out of mind, it was never yours to begin with. I mean, that's how I calculate my payroll now. I know approximately what the taxes are and everything, and I just have it in my head of how much is going to come out, including the taxes, and I don't have to worry about it. And actually, they took out a dollar and 33 cents too much.
Last year, I got a nice little refund of a dollar 33, but the point is I would much rather have a dollar 33 coming back in a dumb check then to, owe $15,000 in fees.
Deltrease Hart-Anderson: Absolutely. And there are even some online time clocks that will ask actually calculate the payroll as you go.
So you'll be able to see how much in payroll gross as well as payroll taxes. Yeah, there are all sorts of ways to help you plan for the payroll taxes and most of the times I find that small business owners, if they know in advance, what to expect as far as how much they have to pay, they can come up with it.
But if they ignore it or defer it and maybe not ignore, ignore may not be the right word, but if they defer it, that's when the issues come.
Meredith Matics: Yeah. I think as small business owners were usually not operating on extremely high margins. Money coming in is going out. We bill once a month. And so when I bill, I try to say, well, where is that putting our budget for the month? My first thing that goes through my brain is payroll. With taxes and everything, our payroll is an estimated of this amount and then rent and then utilities. Things that you can't get rid of or change like you can maybe not buy so many pens this month or something, but you can't really change your rent requirements or your payroll requirements or your utilities.
Deltrease Hart-Anderson: Right.
Meredith Matics: So I figure out what are all those? And then I know, okay, what do I have left for the month? Even when it comes to small business owners, realizing too, that's what you're taking home, that's your end of the day. You don't necessarily want to be taking out money that isn't really yours.
Deltrease Hart-Anderson: Absolutely.
Meredith Matics: Do you have any other last tips for our listeners? If they're starting to go down a black hole of tax?
Deltrease Hart-Anderson: I would say, especially if it looks like you are about to be in a bad situation, or if you're in a bad situation now, just don't stall. Address the issue head on.
Now we're talking about someone owing taxes, but sometimes people get letters from the IRS and the IRS doesn't always get it right. You have to make sure that the debt is yours in the first place. Then you have to look at did they assess it right? Are the penalties and interests accurate based on when you got into tax trouble? Look at your books and records to see did you calculate the tax liability correctly? Then you start looking at, okay, now since you know this debt, if it is correct, start looking at how long does the IRS have to collect on this debt? Typically 10 years, but there are some certain things that can extend that timeframe. Start analyzing what is my ability to repay the debt? Yes IRS you may want $500 a month, but I don't have $500 a month. I have $150 a month. You have to start crafting your negotiation.
Whatever you do, address it head on. If you don't have the expertise to do it, or if you're afraid of the IRS, many people are. Get professional help. Make sure and get a licensed person to assist you with the debt. I'm not talking about calling those large marketing advertising firms. Talk to actual professionals. You really want to speak to a professional that understands tax debt.
Meredith Matics: Yes. One of the questions that I've been asked by a fellow business owners before is like well is it really worth having somebody prepare your taxes or just doing it on TurboTax? I say it is definitely worth the expense of having somebody who's a professional to do it. Because, one from the beginning, you're less likely to have a problem down the line. Two, you would have them as a support system or as backup to why did these things get filed this way? Cause their names on it too.
Deltrease Hart-Anderson: Absolutely. Yes. I do this in my own business. I want the professionals that have something to lose. That's why if I call a plumber, I am going to look at my state website and look at all the licensed plumbers. I want a licensed plumber because they have to keep up with the license. If they don't do what they say, they're going to do, guess what happens? They lose their license.
Meredith Matics: So as we close up, what is one piece of advice that you as a business owner have received that you want to share with our listeners?
Deltrease Hart-Anderson: The best business advice that anyone has ever given me was if you can't afford anything, the first thing you want to get is an assistant. Get someone that can answer the phone so you won't have to. Get someone just to help you breathe in your business because we wear so many hats as a business owner. Even if you can't afford a full-time assistant, you can start off with a part-time assistant or a quarter-time assistant. That was the best piece of advice that any other business owner has given me.
Meredith Matics: And I will even say, as far as an intern, there's a lot of local colleges that are looking to place people who want to be exposed and work in the industry so there's also that option. And Deltrease, where can our listeners who are now probably very concerned about their taxes find you and learn more?
Deltrease Hart-Anderson: Absolutely. If someone is in tax trouble, please reach out to me, schedule a free appointment for a tax analysis, just free tax relief analysis at www.Callthetaxpro.Com. That's c-a-l-l-t-h-e-t-a-x-p-r-o. Call The Tax Pro.com. Or I'm on Twitter, Instagram and Facebook at dhartaccounting and then my regular website is dhartaccounting.com.
Meredith Matics: Well, thank you so much for coming on. This is really timely as we've now entering the the never ending tax seasons back.
Deltrease Hart-Anderson: The extension of the extension. My pleasure Meredith, I really enjoyed it.
Meredith Matics: Thank you so much.
Deltrease Hart-Anderson: Take care.
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