A few months ago I met with a nice young lady named Rebecca. She recently received a series of "love letters" from the state tax department. Turns out that Rebecca had not filed any state income tax returns for the past 5 years, and the state government finally caught up with her and was demanding that those returns be filed ASAP.
I asked Rebecca why she hadn’t filed these state returns. I’ll never forget her response: "Because my mother told me I didn’t have to file a state tax return."This is another "sad but true" story that happens every day to thousands of people.
Someone in your family (or someone at work, or someone at church, or someone you know well and therefore trust) knows somebody else (from work or church or wherever) who read an article or a book or somehow came up with a little nugget of "tax wisdom" that they are dying to pass on to you.
Everybody likes to be an expert, right?When it comes to taxes (like any number of other subjects), a little knowledge can be extremely dangerous.
Because Rebecca listened to her dear Mother, she was now faced with a 4-figure tax bill, which included hundreds of dollars of penalties and interest that could have easily been avoided.
Rebecca only had to do one thing to avoid the big mess she now faced. Consult a Tax Professional.Sometimes, that’s all it takes to save yourself a lot of grief.
Now I realize that many people are capable of preparing their own income tax returns without professional assistance. Every year, millions do it. And maybe you have a simple tax situation. All you have is a W-2, you take the standard deduction, and that’s it. Nothing fancy. For those kind of returns, go ahead and do it yourself.
(NOTE: I do have many clients who have a simple tax situation and still come to me year after year, not wanting to prepare their own return even if it is incredibly simple. And I can understand the way these people look at it, too. I’m the same way when it comes to car maintenance, for example. If I really wanted to, I could learn how to change the oil, but why bother? I prefer to let a professional handle even the most basic auto maintenance and repairs. You couldn’t pay me to change the oil myself.)
But if your tax return is in any way "complicated", then the old adage applies: "Don’t try this at home!"The need for professional tax assistance is especially critical for Small Business Owners and The Self-Employed. Even running a one-person business significantly complicates your tax situation. Business income tax returns are much more complex than your average W-2 employee-type tax return.
Let’s take a typical situation. You start a new "part-time" business, and for the first year or two you operate as a Sole Proprietorship. You still have your regular W-2 "day job", so you don’t make much money for the first couple years and you stumble through your tax return each year, doing your own Schedule C even if it kills you.
Then, in Year 3, things really take off. Your business becomes profitable and you decide to quit your day job and devote yourself full-time to it. And you find out that since you are selling a widget that could expose your liabilities, you figure you better protect yourself, so you form a corporation.
Now that you’ve formed a corporation (or maybe it’s a Partnership or a LLC) you soon find yourself buried in paperwork. Why does our government make it even harder on you with all these time consuming, costly tax-reporting regulations?
Now that you are no longer a Sole Proprietorship, you must file not one but two business income tax returns (one Federal, one State). These business tax returns are totally separate from your personal tax returns that of course must still be filed by April 15.
And if you have employees, well, now things really get interesting! Even if you have just one employee, you must file a bunch of payroll-related tax returns. How many is a "bunch"? How about as many as 40 different payroll tax returns must be filed during the year -- whether you have one employee or 100 employees! These payroll tax returns are due at different times during the year, some monthly, some quarterly, some at year-end, culminating with the final "blizzard of paperwork" (W-2’s, W-3, 1099’s, etc.) due by January 31.
And whether you realized it or not, your corporation does indeed have at least one employee -- YOU!Please take note: if you, as the corporation’s owner, performed services for the corporation (and it is very likely that you did), then the corporation must pay you some type of "reasonable compensation" as an employee. So even if you have no other employees, you are probably the corporation’s one and only employee, and so you must file all the above-mentioned payroll tax returns.
So that’s why I now ask you this very important question: Do you really want to prepare all these business tax returns without the help of an experienced Tax Professional?
Maybe you do. Maybe you like filing reports and processing paperwork. But even if you are capable of figuring out all these business tax returns, perhaps you are better off letting a professional handle this, so that you can spend more time running your business instead of "running the numbers."
And if you are not that good at government "paperwork" (which is true for many business owners), it is easy to see why bureaucratic "red tape" is one of the main reasons new business start-ups "drop like flies" in the first couple years they’re open.
Business income tax returns (regardless of what type of entity you own: Sole Proprietorship, Partnership, Corporation, Limited Liability Company) contain a multitude of mind-numbing forms and calculations. If you don’t do tax returns for a living, you are really playing with fire here.