Key Takeaways:
- Check your payroll and industry compliance tax rates regularly for updates to avoid penalties and interest from underpayment during quarterly filings.
- Properly classify employees versus contractors and align your business practices with your tax strategy to prevent costly adjustments and fines.
- Manage executive and owner compensation effectively, including proper documentation of draws and retirement contributions; meet requirements with compliance filings and diligence.
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As a professional services provider — whether you run a law firm, marketing agency, public relations company, architecture firm, or engineering consultancy — managing tax compliance can feel like a never-ending challenge. From industry-specific regulations to keeping up with rate changes to properly classifying employees and contractors, it’s crucial to stay proactive. Mistakes can cost you in penalties and interest, so let’s break down some key areas you should focus on.
Update Your Payroll and Industry Compliance Tax Rates Regularly
When the new year rolls around, published payroll tax rates, thresholds, and compliance items often change. These include federal, state, and local taxes, unemployment insurance rates, and compliance items like sales tax or permitting fees — which can vary significantly based on your business location and setup. While large payroll providers like Gusto and ADP often handle some of these updates automatically, smaller systems might leave this responsibility on your shoulders. Proper set up in point-of-sale (POS) or enterprise resource planning (ERP) systems can be daunting but is essential.
Risk:
If you fail to update your rates, any shortfall discovered during the quarterly filing will fall on you as the taxpayer. Payroll tax or sales deposits that fall short can trigger penalties and interest for underpayment, which are the responsibility of the company.
How to Manage the Risk:
- Schedule a compliance environment review with your accountant before quarterly payments are due.
- Confirm that all federal, state, and local rates are accurate and current.
- Audit your sales tax collection to verify POS and online sales platforms are correctly calculating and collecting taxes.
- Be sure about graduated receipts requirements and deadlines for permits and licenses, as these are not always “same as last year”.
- Double-check employee classifications to avoid misclassification penalties.
Align Your Business Spending with Your Tax Strategy
Year-end accounting may reveal gaps between your business practices and your tax strategy, especially around employee-versus-contractor classification. Misclassification carries significant financial risks — including penalties and the need for costly amended returns.
In recent years, states like California have tightened the definition of independent contractors. Considering the additional costs and obligations that come with employees, it is important to carefully weigh the costs and the benefits — as well as the risks — of using independent contractors.
If your workers have been treated as contractors rather than employees but meet the regulatory standards of employees, it’s not too late to make adjustments. Revisiting these arrangements with your contractors/employees and amending your payroll filings can help you avoid hefty penalties down the road. Many employers make such considerations at the preference of the contractors themselves, but it is important to keep in mind it is the business (not the contractor) who is opening themselves up to potential consequences.
Risk:
Improper classification of employees and contractors can expose your business to costly adjustments and fines. Additionally, handling bonuses outside of regular payroll can complicate reporting and create compliance issues.
How to Manage the Risk:
- Conduct a thorough review of employee and contractor classifications.
- File 1099s for all independent contractors — even if it’s late, it’s better than not filing.
- Carefully consider the additional costs of taking on employees (payroll taxes, increased workers’ compensation insurance) against the potential liabilities for non-compliance.
- Review year-end bonuses, especially if paid in cash, to confirm they were properly recorded in payroll filings.
- Correct errors promptly by amending filings as needed.
Manage Executive and Owner Compensation Effectively
Compensation planning for executives and business owners goes beyond standard wages. Compensation structures, distributions, and retirement contributions must align with your business and tax strategy.
Risk:
Failing to manage compensation properly can impact pass-through results, personal taxes, and compliance with financial covenants.
How to Manage the Risk:
- Regularly assess compensation structures to verify they align with current roles and business strategies.
- Document all draws and retirement contributions meticulously.
- Keep accurate filings and promptly address any discrepancies.
Be Prepared for IRS Shake-Ups
The IRS has undergone significant changes recently, with staffing shifts that have created uncertainty around audit frequency. While it might be tempting to assume that reduced IRS resources mean lower audit risk, this could be a dangerous assumption.
Despite the recent reorganization at the IRS, businesses should not let their guard down when it comes to business and regulatory tax compliance. The question isn’t whether you’ll face an audit, but whether your practices would stand up to one if it occurred. Implementing a strong, current tax strategy and strictly following it in practice is the best path to security.
Take Control of Your Regulatory and Compliance Strategy
Managing compliance requirements as a professional services provider can be daunting, but taking a proactive and strategic approach will help you stay ahead of potential risks. Consider meeting with your accounting professional to review your operational setup, align your compensation strategy, and catch any issues before they become costly problems.
How MGO Can Help
Our dedicated Professional Services team understands the unique needs of law firms, advertising agencies, architecture firms, marketing companies, PR firms, engineering firms, and more. We provide a full suite of tax, consulting, and assurance solutions to help you manage risks and seize new opportunities. Reach out to our team today to find out how we can help you streamline your strategy and maintain compliance.