While there aren’t that many tax changes that will affect small businesses this coming tax season, what’s new—combined with evergreen tax issues that tend to baffle small businesses—could cause headaches if owners aren’t careful . For starters, there’s a big tax bill for many pandemic-related business owners well ahead of the April 2023 federal income tax deadline. Small businesses that took advantage of the 2020 Covid provisions to defer some of their Social Security taxes were required to repay 50% of what was owed in early 2022. The other 50% is due on January 3, 2023.
The IRS sends notices reminding business owners to pay what they owe by the due date, but it’s still something that can easily slip, especially if owners aren’t paying close attention, said Eric Bronnenkant, head of tax at Betterment and assistant professor of taxation at Seton Hall University. Here are some more tips to stay ahead of the IRS this income tax season.

For tax year 2022, many business owners may receive a form that they have not received before. This form is a 1099-K, and holders who receive a payment of $600 or more through a third-party processor such as Venmo or PayPal should receive it. In previous years, the form was only sent if payments totaled more than $20,000 and there were more than 200 individual transactions. The obligation of owners to report their income has not changed. But landlords who might have been lax in the past now have more incentive to report that income since there will be a record on file with the government, Bronnenkant said. He also suggests that owners check to ensure that all payments on the 1099-K form are actually for goods and services, as opposed to a gift from a friend that was mislabeled. “You shouldn’t have to pay taxes on it just because someone issued you a 1099-K with incorrect information,” Bronnenkant said.

Keep business and personal income, expenses separate

Many owners don’t think to draw a hard line between business and personal income and expenses, but that can be a big mistake. Combining funds may seem easier, but in reality, it creates extra work to calculate the business’s income and expenses and if audited could lead to potential tax headaches and could cost businesses more in the long run, tax professionals say . . The Wave State of Small Business Study 2022 found that 35% of small businesses are blurring the lines between personal and business accounts. This is even higher among micro businesses, where just under half, 48%, have a small business bank account. The advice against combining applies to bank accounts and credit cards. If a business is audited, the owners must be able to document that the expenses they paid were business expenses. If they use a personal credit card and the business comes under scrutiny, the IRS could deny those deductions, and the burden of proof will be on the taxpayer to show it was a legitimate business expense, said Steve Rossman, a tax partner in the Philadelphia office. accounting and consulting firm Armanino LLP. “This could lead to penalties from federal, state and local governments for underreporting income,” he said.

File your tax return even if you can’t make payments

Business owners who can’t pay the full amount owed in taxes should file their federal tax return and get a payment plan, said Brad Sprong, national tax leader for KPMG Private Enterprise. These owners will still pay interest on the money they owe, but they can avoid additional penalties for not filing or filing late, which can further reduce business profits. “It’s hard to get those penalties reduced, and the penalties don’t go down, so it comes out of the bottom line,” Sprong said. Business owners who need more time to work on their returns beyond the original April 15 filing deadline should apply for an extension to avoid the late filing penalty. That penalty is 5 percent of unpaid taxes per month, capped at 25 percent of the balance owed, Rossman said. Owners should then make sure to file the extension by the extended Oct. 15 expiration date, he said. Even with an extension, however, owners should estimate what their tax liability will be and pay that amount by the original tax deadline. Owners who can’t afford to pay the full amount at the time should pay what they can to reduce any underpayment penalties, he said.

Set aside cash to cover tax liabilities

A good rule of thumb for startups — and for all business owners to avoid the situation where they can’t pay their entire tax bill — is to set aside 30% to 35% of net income, according to the Sprung. Not putting enough aside could mean you have to scramble to find money to pay Uncle Sam. She offers the real-life example of a $100,000 real estate business owner who owed about $30,000 in taxes but didn’t have the money to pay because she had used her available cash on advertising, open houses and other business expenses. “Even if you go into a payment plan with the IRS or get a loan from a bank, you’ve absorbed some of your borrowing capacity,” he said.