Business Tax Tip: Make Sure Salaries are Reported Correctly
Working on growing your business is important. However, working to improve your business is also important. One aspect that many businesses (whether established, startup, big or small) allocate little resources is the accounting and finance function.
Not understanding the financial or accounting data, your company has may cost you money.
Many start-ups and small businesses neglect their accounting and incorrectly show employee income tax withholding as a tax instead of as wages (For example: $50,000 salary with $10,000 employee withholding tax should be reported as $50,000 salary expense instead of $40,000 salary expense and $10,000 payroll tax).
Although the net expense doesn’t change, here are 3 reasons why the correct accounting should be used:
1. If your tax preparer relies on your accounting, tax credits (such as R&D credits or hiring credits) may be understated if your wages are understated.
2. Underreporting your wages, may distort your state taxes as some states tax your business based on the ratio of payroll within the state.
3. For multi-state businesses, the amount of payroll reported is generally audited. If your income tax reporting doesn’t match your payroll reports you will incur a higher level of scrutiny costing you time and money.
Have more questions on how your accounting impacts your taxes, contact Richard Pon, CPA for a consultation.
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