Starting a startup is one thing, and when it comes to taxes, even the minor drawbacks can have major repercussions. Founders, rushing towards growth, tend to neglect legal and tax compliance; thus putting themselves on unstable grounds.
Keep reading to learn some of the most typical tax errors that a startup may commit without the help of an LA tax attorney.
1. Why do startups misclassify employees and contractors?
Most often, startups take advantage of freelance employees or contractors to reduce expenditure, yet most of them fail to classify the independent employees correctly. There are strict criteria applied by the IRS in an attempt to establish who may be an employee and who is a contractor.
Misclassification may result in unpaid payroll taxes, penalties, and even legal conflicts. This is quite an expensive pitfall that a tax lawyer can help startups to prevent by appropriately structuring the work contracts.
2. How do startups mishandle deductible expenses?
Founders do not document personal expenses as business deductions, including travel, meals, or home office, to name but a few. The IRS is suspicious of these claims. A tax attorney also structures the expenses to maximize deductions, avoid the risk of audit, and qualify for Schedule C deductions.
3. Why is failing to collect and remit sales tax a common issue?
Many startups, particularly e-commerce businesses, overlook the fact that they might have to pay sales tax to multiple states. Due to increased digital sales, the nexus rules of taxation have ended up complicated. Startups without the help of the law are subjected to liabilities and penalties. A tax attorney assists companies in multistate tax compliance and prevents the unpleasant expense of a surprise tax.
4. How do equity and stock options create tax mistakes?
Startups employ the use of stock options and equity as they want to hire people. When, however, these are not ordered correctly, there may be unwelcome tax bills both to the company and the employees.
An illustration will be the penalties that ensue as a result of mishandling IRĂ vi0093 tors 0097 0090 1681 1691 409A valuations. Legal advice is used to guarantee compliance of equity schemes with tax laws to safeguard the expansion strategy of the company.
5. What happens when startups ignore estimated tax payments?
Early-stage business owners sometimes believe you can wait until tax season to pay. However, businesses are supposed to make quarterly estimated tax payments. Not making these payments costs penalties and advises cash flow problems. A tax attorney assists tax startups in figuring out and scheduling these payments correctly.
6. Why do startups struggle with international transactions?
If a start-up has dealings with foreign clients or employs overseas freelancers, it may well incur international tax liabilities. Without legal advice, entrepreneurs are at risk of double taxation or non-compliance with the IRS foreign reporting rules. A tax lawyer from Sacramento, CA, or other places sees that international transactions comply with U.S. and foreign tax rules.
7. How do startups overlook entity structure tax implications?
Selecting an incorrect business structure, LLC, S-Corp, or C-Corp, can impose tax penalties. To take a specific example, an example of C-Corp might not be appropriate in the case of a small startup, and an LLC might have a limited ability to raise funds.
Legal counsel assists founders in making a structure and tax-efficient and aligns with long-term wishes.
