Tax obligations are of course part of any business, no matter the size or the entity. For some contractors the thought of paying taxes is an afterthought that sometimes gets forgotten until after the due dates. However, this does not negate the obligation to pay, and penalties will continue to be imposed because of failure to file and/or pay the required taxes.
From years of experience working with contractors, we know that the construction industry is known for large cash outlays prior to receiving payments which are tied to percentage completed. This makes cash management a necessary practice for contractors seeking to minimize risk and stay on budget. A tax bill which is unaccounted for will limit the availability of cash and can result in unwanted surprises down the line. To avoid the shock of receiving a large tax bill that you were not expecting, here are a few recommendations.
Be Consistent: Pay Employment Taxes
Account for and pay employment taxes in a timely fashion. Deposits must be made according to one of two schedules, either monthly or semi-weekly. The schedule used for your current calendar year depends on the amount of employment taxes you reported during your lookback period. Under the monthly deposit schedule, employment taxes on any given payments made during a month must be paid by the 15th day of the following month. If you are unsure of which schedule to follow, or have questions regarding your lookback period, it’s always wise to consult a professional.
In some cases, for instance during a cash crunch, contractors are forced to devise creative ways to meet some employment taxes immediately and defer the balance until additional revenue is received. The issue with this approach is that payroll obligations consist of the employment taxes in addition to the net wages to the employees.
As a business owner, you are certainly entitled to defer deposit and payment of the employer’s share of Social Security tax, prior to applying the Research Payroll Tax Credit against the employer’s liability for the employer’s share of Social Security tax.
Minimize the Accounts Receivable
There are several practical strategies to minimize your Accounts Receivable. One key procedure is to send invoices as soon as possible after completing a project. This can prevent delays, enabling you to get paid faster. If your company is still sending out paper copies of invoices via the US mail, it’s probably time to start billing digitally.
Even if this seems out of your comfort zone, you can always start by sending a digital invoice and following up with a hard copy later, noting on the electronic version that there will be a paper copy sent “upon request." Most recipients are happy to receive digital copies, to reduce the clutter in their own office, and all parties will be doing something environmentally-friendly for the planet.
Quite importantly, ensure your invoices are transparent—meaning the recipient won’t have a lot of guesswork when it comes time to pay—and always establish clear payment terms. Offer multiple payment options: electronic payments are sometimes immediately received, as opposed to waiting for payment to be sent. Surely, never hearing the words “the check’s in the mail” would be welcome to any contractor.
If despite all your best efforts, some bills remain unpaid for longer than you’d like, then the next logical steps must include sending timely reminders. Remember the old adage “You can catch more flies with honey than with vinegar”? No matter how frustrated you feel upon not receiving payments in a timely manner, it’s important to take a polite tone and to use appropriate language when contacting the payer—whether on a call or email.
If you have staff trained to do the reminding, ensure that they have the right demeanor. Even while being courteous, a good collections person can still be firm when requesting overdue payments.
Automation (and everything that falls under that large umbrella) will benefit any business, as long as everyone who is using it is properly trained and knowledgeable regarding new protocols. Automation can reduce human error by improving accuracy, as well as speed up the billing and collection processes.
Engage in Tax Planning
The process of tax planning and financial management (in this case a business’s income, expenses and activity) will minimize the company’s tax liability and maximize its success. Smart tax planning practices never leave money on the table.
It’s never too early to plan. Make an appointment with your tax professional to discuss getting your tax down to the ideal number as soon as your taxes are filed. If you owe a significant amount, there are plenty of strategies to reduce that bill, but you must plan ahead to achieve more predictable results.
Some sets of data stay the same year-to-year or may fluctuate very slightly. For example, requirements often found at the top of the tax preparer’s list can be retained in a file separate from those that contain the “variable” information. All of what’s needed can be easily retrieved via reports from a good accounting program. Necessary planning reports include a Balance Sheet, Income Statement, Cash Flow Statement, and a General Ledger. If you use QuickBooks or a similar system, these reports can be created with a few simple steps and then set aside in an electronic file.
Other crucial information to prepare for tax season includes monthly bank and credit card statements saved from the bank’s website or scanned. Inventory counts should be taken periodically and depreciable asset purchases and disposition records must be maintained. Getting back to where we began, make sure to have access to payroll reports, including wages, employment taxes paid, and workers’ compensation coverage.
Having all your company’s information organized will prevent stress year ‘round, but especially at tax time. Keep in mind that a professional tax advisor will not only prepare your taxes, but they will also help you plan ahead for the months and years to come.
Founder and CEO of LEK Management Inc., Lynn Karam has two decades of experience in finance, operations, and strategic planning. Karam is an Enrolled Agent authorized by the United States Department of the Treasury to represent clients who are undergoing an audit and to negotiate with the IRS on her clients’ behalf. Her success rate in resolving even the most challenging of IRS scenarios has become the cornerstone of her success. As CEO, Karam uses her financial expertise to establish sustainable strategies that result in significant business growth for her clients.