10 Tips To Surviving Tax Season

Running a 12-employee company out of Cleveland, Ross-Tek founder and president Frederick Johnson is expanding his VAR business to service midsize customers in a number of states, which can create some complex dilemmas during tax time.

"There's always a question about what is taxable and what is not, especially in providing goods and services in another state," Johnson says. "There are misconceptions and rules regarding whether your consulting services are taxable according to how much of the services are performed on-site."

And that's not all. There are also tax-related puzzles when it comes to internal matters, such as staffing. Many small VARs hire on a contractual basis. By the end of the tax year, such moves can come back to sting you.

"You may consider an outside consultant a contractual employee, but there are gray areas," Johnson says. "If that employee does a majority of their business for you, then the IRS may have a different opinion. Being a small business, if we weren't so careful, we'd get hit from both sides come tax time."

Fortunately, with some tax knowledge and input from the experts, Johnson is able to meet the goals of his VAR business while still remaining in the good graces of the IRS. He and other SMB VAR executives--as well as experts who provide advice to those clients--have provided 10 tips to VARBusiness as surefire ways to survive the tax season.

1. Get help--You can't do everything in-house: The first crucial step is recognizing that you can't tackle taxes on your own. Your background isn't likely in tax accounting, so why pretend to be a CPA? In 1993, when Michelle Drolet co-founded Conqwest, a Holliston, Mass.-based SMB VAR that provides Internet security solutions, she didn't kid herself when it came to tax time. Conqwest went with a proven, local accounting firm and hasn't looked back. "They come up with the formula to have our payroll deductions taken out," Drolet says. "Payroll can be a real 'gotcha' for the SMB. You can really mess yourself up by not paying those taxes properly."

2. Integrate tax planning into your company's "big picture": Like Conqwest, Ross-Tek farms out its nuts-and-bolts tax preparation and oversight to a local accounting firm. And like many SMBs, the company can't afford a full-time CFO. So, in addition to an accounting firm, Ross-Tek has hired out what it calls a "virtual CFO," a professional with "bigger picture" corporate financial skills. The CFO, who works on a retainer basis, is crucial to Ross-Tek when it comes to developing strategies on debt-equity ratios, cash-flow forecasts, risk assessment and other factors. And that CFO is incorporating the company's tax picture into those various factors as its strategies develop. "We're moving into the midmarket space," Johnson says. "We'll also be doing more jobs out of our home state of Ohio. Our virtual CFO provides much-needed guidance to help us get to where we want to be."

3. Pay now, get paid later: If you're an SMB and cash flow is relatively stable, consider postponing some projects to reduce your immediate tax burden. "Postpone it until the next year, if you can," says Kevin Bowe, CEO of Millennium Business Solutions Group, a Westlake Village, Calif.-based SMB VAR that sells business-process IT solutions. "And if you can, accrue expenses--payroll, payroll taxes, benefits, vacations, etc."

4. Sell with caution: If you're planning to sell your SMB VAR eventually, err on the side of caution. A company sale will bring on IRS scrutiny. Drolet sold Conqwest and bought it back. "When company records are reviewed pending the acquisition," she says, "you better make sure you weren't using your business to pay the baby sitter or your kids' tuition. When it comes time for a sale, everything will be disclosed."

5. Make things clear: Clear the blurry line between employee and freelance contractor. The upshot is that the line between staff employee and contractual hire can be awfully fuzzy. And here's what can kill you--the IRS takes some liberty in defining "staff employee" in broad terms. Even if your contractor works from India and your SMB VAR is in Detroit, that contractor could be legally defined as an employee by the government. If your SMB is their primary client, or even if they telecommute but use your tools, you could get stuck in a legal bind. "The IRS will want to treat them as home-based employees in that case," says Eva Rosenberg, a tax expert who services SMBs and provides guidance at www.taxmama.com.

6. The IRS can be an ally: They're not "out to get you." In fact, the Department of the Treasury provides pointers and resources to help SMBs with the Electronic Federal Tax Payment System (EFTPS), a free service that permits users to pay all federal taxes electronically (see www.simplifysmallbiz.info for more). The IRS also has teamed up with CMP Media's Small Business Pipeline (CMP Media is VARBusiness' parent) to offer a comprehensive tax-resource center that provides help (www.smallbizpipeline.com/resources /taxcenter.jhtml).

7. Rein in your employees: Some of them may actually avoid paying taxes or "forget" to file a return. Some will increase their exemptions to avoid withholding taxes, you and your SMB VAR could be held liable.

"Set up your payroll system so W-4 changes that reduce withholding require a supervisor's approval," Rosenberg advises.

8. Remain mindful of other taxes: You need to stay on top of not only employee taxes, for example, but also employer taxes, such as unemployment.

"You really can't afford to overlook those," says Jim Heeger, CEO of Palo Alto, Calif.-based PayCycle, which provides software tools.

9. Stay on top of tools to help you: OK, so you decide to ignore tip No. 1 and try to do this on your own. Fine. There are more than 400 tax updates in any given year. Many online tax services can offer 24/7 support, not to mention dropping e-mail reminders about deadlines. PayCycle's automated software service will help you stay on top of current tax rates. Intuit's TurboTax Estimated Taxes helps SMBs with estimated taxes.

10. Make sure your records are accessible: After you've filed, make sure your records are readily accessible and safely stored. You need to keep them no less than three years and up to seven years in some cases.

"Businesses should keep cash-register tapes, bank-deposit slips, invoices and credit-card charge slips to document gross receipts," says Bradford Hall, managing director of Irvine, Calif.-based Hall and Company, an accounting firm specializing in SMB customers.