One year on from the Tax Cuts and Jobs Act, QuickBooks Payroll surveyed 600 small business owners, accountants, and bookkeepers throughout the U.S to find out how they have responded to tax reform and whether, as a cohort, they share any common tax challenges*. To put the data in context, QuickBooks also caught up with three leading experts during a special webinar on the topic of taxes and tax reform:
- Eric L. Green, an attorney with Green & Sklarz who represents taxpayers before the IRS, the Department of Justice Tax Division, and state departments of revenue.
- Beverly Lang, who offers more than 20 years assisting business owners, managers, and bookkeepers with their accounting and bookkeeping.
- David Williams, Intuit’s Chief Tax Officer.
Money and taxes are major challenges for small businesses
The survey revealed the top three challenges among the small businesses surveyed are taxes, cash flow, and payroll. More than 1 in 5 (22%) added that IRS guidance and resources aren’t created with small businesses in mind.
Top small business challenges, according to survey respondents
“Smaller businesses are juggling virtually everything,” said David Williams during the webinar. “As you get into a bigger business, you get lots of assistance and lots of help. But if you’re a small business, you’re trying to figure out what you’re going to sell and how you’re going to sell it and to whom.”
“Taxes,” he added, “are certainly something to consider, but they can be confusing, and sometimes they are the last thing that people worry about.”
Williams, having worked with the IRS, said the agency sees this type of problem all the time.
“People were trying to make payroll for their employees but not making the payroll tax payments,” he said. “That’s because they were trying to keep things together, and truly, that can lead to a real problem for businesses.”
What is your opinion about the guidance and resources the IRS provides small businesses?
1 in 4 small businesses delay tax preparation
While most small business owners recognize the importance of early tax preparation, a quarter of small business owners admit they don’t think about tax season until it’s at least two months away, with 15% of those preparing for tax season when it’s just one month away. Two in 5 SMB owners, however, say tax prep starts between six and 12 months before tax season.
How far in advance do you typically prepare for tax season?
More than a third of small businesses don’t work with an accountant
Whether well prepared or not, one surefire way to ease the stress of tax season is to get help from a professional accountant, as many of the survey respondents attest. Still, nearly 40% of small business owners surveyed say they don’t use an accountant to help them with taxes.
There was a fairly even split between respondents who prepare their taxes in-house without help from an accountant (38%) and respondents who outsource the job to an accountant or tax expert (40%). The remaining 20% prepare them in-house with help from an accountant.
But if accountants are useful to small business owners planning for tax season, why don’t more business owners take advantage of tax services? Some perceive them to be too expensive. Other just don’t see the value in using an accountant.
What is the main reason you don’t get help from an accountant?
How to decide when you need help with your taxes
Beverly Lang spoke about the importance of finding a full-service solution: “I know a lot of small companies or mom-and-pops want to try to do it in-house to alleviate some cost,” she said, “But in the long run, if you get something incorrect, the penalties and the fines that you’re going to have imposed are going to far outweigh what you would pay if you hired a full-service [accountant].”
If you’re a business owner set on doing your taxes in-house, Lang says it’s a good idea to reach out to a CPA or tax professional anyway, to get some clarity on how payroll accounts need to be set up, especially if you provide employee benefits. This will help you determine if the benefits are pre-tax or post-tax, which can help you avoid costly mistakes.
And because there are so many tax regulations for states, local municipalities, and cities—in addition to federal laws—Lang stressed the importance of either knowing well what you are doing or spending a little extra on peace of mind by getting a professional to help you.
Accountants save small business owners time, stress, and money
While many small business owners resist using an accountant, their value is clear. Of the small business owners who receive help from an external accountant or tax expert, 85% agree that it saves them time and money, reduces stress, helps with compliance, and helps them plan ahead.
The most appealing aspect of using an accountant, however, is the time-saving aspect followed by stress reduction. Though 82% agree that accountants and tax experts help with compliance, or operate by IRS standards, 18% disagree.
For small business owners who have not yet started using an accountant, Williams recommends they seek help with their taxes sooner than later. Having a professional who understands tax nuances and changes to tax laws can make a huge difference.
How does your external accountant/tax expert help you?
Planning for tax season causes most stress
Around 2 in 5 (42%) of the survey respondents agree the most stressful part of tax season is planning ahead for what they’ll owe, followed by paying attention to deadlines and bracing for the financial burden tax season will likely cause the business. One in 10 are concerned with filing correctly, and almost 1 in 4 are concerned with compliance.
Which aspects of tax season are the most challenging?
Planning ahead is difficult, but Williams says having a plan is the first step for business owners, even if it’s very challenging. Getting ahead of what you owe and truly understanding it can help you as you build your business.
“You need to plan ahead for your taxes and think about when things are going to be due,” he said. “Use your accountant or tax professional to help you build the plan. Then you can execute against that plan because you’ve thought through all of the liabilities and opportunities for you as a small business owner.”
With the new tax reform bill, there will be benefits small business owners will want to take advantage of for professional planning.
Small businesses are more likely to get tax refunds than owe taxes
According to the survey, 67% of small business owners say they typically receive a tax refund, while just 19% owe money in taxes. The remaining 14% break even, neither receiving a refund nor owing money. Those small business owners who outsource everything to an accountant or tax expert were over 26% more likely to receive a moderate tax refund.
When you file your business taxes, do you typically receive a tax refund or owe money?
Tax refunds are typically put into savings or passed to employees
Of respondents who receive a tax refund, 41% choose to save for the future, while just under a third use it to pay off debt.
Employees also get theirs when it comes to small business tax refunds. More than a third of small business owners who receive money back on their taxes channel the extra money into pay raises and bonuses for their team. The overall health of a small business is also impacted by tax refunds, as 74% agree that their tax refund is overall helpful to their business’ financial health.
What do you typically do with the tax refund?
How helpful or unhelpful is that refund to the overall financial health of the business?
The importance of getting payroll taxes right
The IRS and the Treasury Department look at compliance and enforcement very differently for income taxes and payroll taxes. They also view unpaid payroll taxes as not only shorting them on money owed, but it’s also shorting money that could be set aside for employees. This is why the IRS takes a much harder stance on payroll tax compliance and enforces it strongly, so penalties can be significant and accrue quickly.
Small business owners who are trying to make ends meet might put taxes off, but the IRS is looking out for the employee as well, meaning they’re expecting payroll taxes to be paid in full. As a result, Green says there are significant risks in trying to go it alone when it comes to payroll taxes.
“A business is an asset like any other asset,” said Green. “Payroll taxes can actually destroy other assets because there’s a personal liability that will flow out of this for the owners and/or key employees.”
And it’s true: Taxes can be a liability. Of the respondents who said they typically owe additional taxes, rather than getting a refund, 41% say their ability to pay off debt is limited. More than a third (34%) say it prevents them from saving for the future, and 28% say the extra tax bill limits their ability to provide pay raises to employees.
Small businesses could be leaving money on the table
When asked about tax deductions, 56% of respondents said they make full use of them. Another 36% said they could make better use of deductions, and the remaining 8% don’t deduct expenses at all. The most common tax deductions small business owners apply for are business supplies (53%) and vehicle expenses (46%).
To what extent do you use tax deductions?
Williams said this year, in particular, there are a number of new tax breaks designed to help small businesses. In addition to increased expensing, there’s also a deduction for certain past-due entities. While every detail isn’t available yet, the IRS has a current list of deductions for individuals, businesses, and self-employed workers.
“In addition to talking to that tax pro, educate yourself,” Williams said. “Think about how your business works, what components of your business might be eligible, and what’s available to you. Work through that with your pro and talk to her or him about what is applicable to you and how to make sure you take maximum advantage and aren’t leaving money on the table.”
Do you apply for any of the following tax deductions?
Respondents report mixed views about the impact of tax reform
The Tax Cuts and Jobs Act is going to have a big impact on this year’s tax season. Are small business owners expecting a positive or negative outcome? Much like the results of other studies, when asked about the law’s general impact, there were mixed reviews. Just about 32% of respondents said it is good for business, while 19% said it was bad for business. Some 18% said it will have no effect either way, while another 22% say they have heard of tax reform but are unsure what impact it will have.
The majority believed tax reform is having a positive impact on profit and investment by reducing taxes, but respondents were, in comparison, less likely to say it is boosting job creation or wages.
What is your opinion on the impact of the Tax Cuts and Jobs Act?
Has the Tax Cuts and Jobs Act led to any of the following?
Where to go if you need help with taxes
If you’re a small business owner concerned about tax season, there are many resources available to help you through it. An expert can help you understand when you’ve got to pay, how much you’ve got to pay, and what taxes are applicable to you. This will ensure you’re making the right payments and taking advantage of deductions you’re eligible for.
- If you need help finding an accountant who’s right for your unique business, start by looking at the QuickBooks ProAdvisor directory.
- Interested in how tax reform might affect your business? Take advantage of relevant resources like the Tax Reform Resource Center.
- Additionally, make sure you are tracking deductions and don’t wait until the tax year is over to make changes or adjustments.
*Methodology
In November 2018, QuickBooks Payroll surveyed 600 small business owners, accountants, and bookkeepers (age 18+) from businesses throughout the U.S. with 20 employees or fewer. The sample was selected by Pollfish. QuickBooks Payroll welcomes the re-use of this data under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted use, distribution, and reproduction in any medium, provided the original source is cited with attribution to http://quickbooks.intuit.com/payroll/