4 Tax Mistakes That Could Cost Your Business More Than You Think

Running a business means figuring out a lot of things as you go. And I’m sure that taxes and compliance aren’t at the top of your list. But sometimes the small stuff, like giving an employee a gift card or skipping a paycheck as an owner, can get you into trouble.

Every year, we see and hear from business owners who get tripped up by technicalities they didn’t even know existed. Some end up paying penalties that could have been avoided. While others miss out on tax savings because they didn’t know what they didn’t know.

If you want to stay compliant, it’s important to be aware of these common tax mistakes.

Keep reading to read about the four places where we find small business owners run into issues. Plus, learn what you can do to stay one step ahead.

1. Employee Gifts Might Be Taxable (Even the Small Ones)

Giving your team a little something extra feels like the right thing to do. But whether it’s a holiday gift, a thank-you card with a Starbucks e-giftcard, or an end-of-year bonus, how you handle that gift may create tax complications.

Cash, checks, and gift cards are all considered taxable income. That means they should be processed through payroll and included in your employee’s W-2. If they’re not, both you and your employee could be on the hook for unpaid taxes.

Even non-cash gifts, like a box of chocolates or a $20 bottle of wine, can be a little tricky. They may be tax-free under something called the de minimis fringe benefit rule. The IRS defines a de minimis benefit as something small in value and given so occasionally that it would be unreasonable or impractical to track. Think - occasional snacks in the break room, flowers for a life event, or tickets to a baseball game once in a while.

But here’s the catch! Once the gift starts to look like compensation, or if it’s given too frequently, it’s no longer de minimis. And to reiterate, gift cards are never de minimis if they can be redeemed for merchandise or have a cash-equivalent value.

The IRS notes that anything over $100 is too large to be considered de minimis, regardless of how infrequent it is. And if a gift crosses the line? The full value becomes taxable, not just the amount over $100.

So, when in doubt, don’t assume that a gift is “too small to matter.” Run it by your payroll provider or accountant to make sure you’re staying compliant.

A token of appreciation shouldn’t turn into a tax issue for you or your employees!

2. S-Corp Owners Need to Pay Themselves a Salary

Are you set up as an S-Corporation and are taking money out without taking a paycheck? This could raise a red flag with the IRS.

As the owner of an S-Corp, you need to pay yourself a “reasonable” wage when you’re actively working in your business. Your paycheck must be paid through payroll, with taxes withheld.

The IRS pays close attention to this. Why? Because distributions aren’t subject to payroll tax, while wages are. If you avoid paying yourself a salary to cut down on tax liability, the IRS may classify your distributions as unreported wages. This can lead to audits, penalties, and back taxes.

The smart move is to work with your CPA to determine what a fair salary looks like for your role. You can also look at Mispar’s Frum Salary Report to get an idea of salary benchmarks in the Orthodox Jewish community. 

Your salary should reflect the kind of work you do and what someone in your position would be paid in a typical market. Once you’ve figured that out, make sure your payroll system reflects it accurately.

3. Even a Small Amount of Foreign Income Comes With a Filing Requirement

International tax reporting doesn’t only apply to huge corporations.

If your business brings in any money from outside the U.S., you could be required to file extra forms like an FBAR.

Even if they are small amounts, the IRS looks at foreign income. If you’re not filing the right forms or reporting foreign accounts, you can be hit with penalties. Even mistakes can cost you up to $10,000 per violation. And even worse, if the IRS thinks you knew and didn’t file, penalties can jump to $100,000 or 50% of the account’s value per year!

If there’s any chance you hold money or do business overseas, it’s worth checking with your CPA now. This isn’t something you want to get wrong.

4. Your Entity Type Might Be Holding You Back

When you first started your business, it was probably easiest to start as a sole proprietorship or an LLC. As your business grows, sticking with your original setup could mean paying more in taxes. Let’s talk about why.

Sole proprietors and LLCs pay self-employment taxes on all profits, which can add up quickly. S-Corp status can lower that burden if you set up payroll and pay yourself a fair salary (scroll up & read point 2).

Please note - if you're planning to look for investors to raise capital or retain earnings in the business, a C-Corp might make more sense. Check out some of the pros and cons of a C-Corporation.

As your revenue grows, it’s a good idea to discuss with a tax or legal pro to make sure your entity type still makes sense.

Megapay Helps You Run Smarter

These aren’t careless mistakes, they’re just things business owners might not be aware of or overlook because you’re focused on other things. Things like serving clients, managing teams, and growing your business. Unfortunately, the IRS doesn’t hand out free passes for good intentions!

At Megapay, we help business owners stay ahead of payroll and tax pitfalls so they don’t have to look over their shoulder. Whether you need help structuring your S-Corp salary, handling taxable perks the right way, or just want a second set of eyes on your compliance setup, we’re here for it!

Is your current setup putting you at a risk? Let's fix it together!

Megapay helps you run your business smarter, without the stress.