What is corporate tax compliance? (and how to keep your small business’s taxes in check

Much to the dismay of nearly all Americans, taxes are a fact of life. They can often cause confusion for individuals just trying to get their tax return submitted in time, but for SMBs and corporations it can be vastly more complicated. 

Sifting through the jargon and confusing technical language can be difficult, to the point where it feels like it’s intentionally confusing.

Despite the roadblocks, staying compliant with state, federal and international corporate tax is essential, especially for small businesses. The consequences for non-compliance could be enough to get your business filed under Chapter 11. 

Trying to keep on top of tax regulations can be tough, as local laws can change quickly with big penalties for those businesses left behind. 

What is corporate tax compliance?

At face value, corporate tax compliance is a simple concept. Businesses must be aware of state, federal and international tax laws, as well as any requirements set by government officials or taxing authorities. To stay compliant, the business simply has to adhere to those regulations.

It’s absolutely essential that businesses take tax compliance seriously as the penalties can be significant. Anyone that has run into trouble with the IRS, or had their tax return denied or audited can attest to how important tax compliance is. 

Think about the annual April deadline for tax return filing. An individual who doesn’t file their return on time is considered non-compliant and risks facing fines and penalties. If you’re running a business and fail to be compliant, the fines could cripple your business. 

What do SMBs need to do to remain compliant to tax laws?

Businesses obviously have more tax responsibilities than the regular individual, which can make compliance tougher. A business must conform their accounting, reporting, and tax filing processes to a different set of laws and regulations than those governing personal tax filing. 

In addition to paying income tax, business entities must also pay:

  • Sales tax on the merchandise and services they sell in specific states
  • Property taxes on their real estate assets
  • Excise taxes and other administrative taxes
  • Employment and payroll taxes
  • Franchise or gross receipts taxes (in certain states)
  • Taxes on the dividends the company provides to its shareholders

Any failure to observe, report, and pay taxes according to these laws can come with significant consequences for a business. This includes fines and other penalties as well as impacts to their brand’s reputation. 

Unfortunately, staying compliant can be very difficult. There are numerous factors that can complicate and impact tax compliance. Even something as simple as misunderstanding a detail in a tax law or inaccurately calculating taxes owed can result in noncompliance.

On top of all that, tax legislation often changes at the state, federal, and international level. Not only does that mean businesses have to work to stay compliant, but they also have to make sure to adjust their tax reporting and filing according to new laws as soon as they come into effect.

Thankfully, there are options available for businesses that feel the pressure and stresses of handling payroll and taxes. Outsourcing to a PEO can make a huge difference, taking the complicated processes away from management, allowing them to focus on what is important.

How a PEO can help with corporate tax compliance

With so many challenges involved in staying compliant, SMBs are increasingly turning to PEO’s to handle their taxes.

A PEO can handle most, if not all, of a business’s back of house and HR needs. If a business is looking to outsource their HR requirements, they can choose a PEO to take over entirely. That leaves management free to focus on the important day-to-day activities and growing the company, without worrying about staying compliant with HR regulations. 

PEOs can offer basic services such as payroll calculation, check production and delivery as well as more intensive tasks such as management reports and EFTPS compliance. They can handle health plans, workers compensation and other employee benefits. Working with a PEO may mean that your employee benefits are as competitive as major corporations in your sector. Most importantly, the majority of PEOs offer a tax filing service that ensures your business stays compliant without the additional stress that comes with it.  

This can be hugely beneficial when you consider the amount of taxes an SMB needs to manage. These include (but are not limited to):

  • Income tax
  • Self-employment tax
  • Estimated tax
  • Employer tax
  • Excise tax

Businesses must check local and state laws to ensure compliance with any additional tax regulations.

Because of the complexity of the process, taxes need a specialist to help you meet deadlines and prevent non-compliance penalties. Having a reliable payroll advisor helps you avoid penalties for violating the Department of Labor laws, including provisions on minimum wage, overtime, and other aspects. 

How does tax reporting and compliance work with a PEO?

SMBs can outsource their payroll to a PEO, but may still be responsible for paying taxes and filing returns. However, there are measures in place that allow for tax obligations to be shifted or shared by the PEO. Using a certified PEO greatly reduces client risk in the event of non-compliance. 

A certified PEO has met rigorous background, financial and reporting requirements that are set by the IRS. The certification ensures financial protection and tax benefits to its clients.

Certified PEOs are solely responsible for federal tax liability and penalties, as the employer of record, and are required to post a bond each year of up to $1 million guaranteeing payment of its federal employment tax liabilities. 

Only a small percentage of PEOs are certified. However, non-certified PEOs can still handle taxes, depending on the agreement. If a company uses a non-certified PEO that doesn’t pay their taxes, the company could be liable. 

If a PEO is deemed as the statutory employer, it will be responsible for the employment taxes on the wage payments that it had exclusive control of. However, if the PEO is merely a conduit for the funds used to pay wages, it is not a Section 3401(d)(1) employer. It is important to remember that the Section 3401(d)(1) employer is only liable for employment taxes on wage payments over which it had control.

The agreement between the business and PEO will dictate which employment tax withholding, reporting and payments the PEO is responsible for on behalf of the client. PEOs pay the client’s employees and employment taxes using funds from the client, and file employment tax returns.

Avoid confusion with MartinoWest

It’s vital that an SMB and the PEO are clear on the responsibilities of each party, as failure to do so can leave the business in hot water. Using a PEO brokerage like MartinoWest can help clear things up before entering into an agreement.

Using a PEO can help your business grow faster, keep your employees happier and save you money on HR administration costs. However, finding the right one can be tricky. 

MartinoWest has over 65 years of combined experience with small and medium sized businesses and we use that experience to make your life easier. So, you can trust us to find the right PEO for your business. Contact us today to see how we can help your business grow without the added stress!

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