A Deep Dive into Small Businesses and Taxes

As many of your small business clients know all too well, it can be a struggle to comply with tax laws. The administrative mechanisms provided by the IRS aren’t widely understood or used, and constantly evolving regulations leave many questions unanswered. Compared to big businesses, small business owners may struggle more with compliance due to limited resources and expertise.

General tax compliance costs for small businesses can be difficult unless they have accounting software that connects directly to their tax software to create a seamless experience. We want to understand how many small businesses are left in the dark when it comes to filing taxes for their business and help shed some light on this issue. When it comes to newly implemented regulations, we want to understand the administrative impact this might have on business owners completing their taxes. What is the level of confidence among business owners that they are in compliance with current regulations? To get the answers to these questions and more, QuickBooks® Payroll commissioned a survey. A summary of our findings are below.

• Preparing for tax season: While 41 percent of small businesses prepare for tax season six to 12 months before it starts, most small businesses leave this planning to later in the year. In fact, 25 percent don’t think about tax season until it’s one to two months away.
• Consulting with an accounting for tax preparation: There is a fairly even split between small businesses that prepare their taxes in-house without help from an accountant (38 percent), and those who outsource the job to an accountant or tax expert (40 percent). In addition, 20 percent take a hybrid approach, preparing their taxes in-house with help from an external accountant.
• Benefits of using an accountant: Of those who do receive help from an external accountant/tax expert, the number one positive factor is the time-saving aspect (88 percent agree), followed by stress reduction (87 percent agree). Though 82 percent agree that accountant and tax experts help with compliance, 18 percent disagree, making this the least popular reason for working with them on taxes.
• Reasons for not using an accountant: Nearly half (49 percent) of those who prepare taxes in-house do so without help from an accountant because they feel it is too expensive. Another 18 percent say they have the expertise in house, while 16 percent say they don’t see the value in using an accountant.
• The challenges of tax season: Despite the fact that 25 percent of small businesses don’t think about tax season until it’s one to two months away, planning ahead for what they owe is the most stressful thing about tax season (42 percent agree). This is followed by paying attention to deadlines (33 percent) and bracing for the financial burden tax season will likely cause the business (29 percent). In addition, 11 percent are concerned about filing correctly and 24 percent are concerned about compliance.
• Tax season outcomes: 67 percent of small business taxpayers receive a tax refund, with the majority of those receiving just a small refund (25 percent), while 19 percent owe money in taxes. The remaining 14 percent neither receive a refund nor owe money.
• Tax refund outcomes: Tax refunds are typically put into savings, (41 percent), passed on to employees through pay raises and bonuses (35 percent), or used to pay off debt (32 percent). About 74 percent of small businesses that received a tax refund agree it is helpful to their business’ overall financial health.
• Tax liability outcomes: In general, small businesses that typically end up owning taxes say the unforeseen costs adds to their financial burden, with 41 percent saying it limits their ability to pay off debt and 34 percent agreeing it prevents them from saving for the future. Pay raises are also impacted, with 28 percent agreeing that the extra tax bill limited the ability to provide a pay raise to employees. However, only 25 percent said that the extra tax bill they incur during tax season is unhelpful to the overall financial health of their business, while 41 percent said it had no real impact.
• Use of tax deductions: Many small businesses admit they could make better use of tax deductions (36 percent), though 56 percent of respondents believe they make full use of them.
• Small businesses and tax reform: Small businesses report mixed views about the impact of the Tax Cuts and Jobs Act, with 32 percent saying it is good for business, 19 percent saying it’s bad for business and 18 percent saying it won’t have an effect. Another 22 percent aren’t sure what impact it will have, while 10 percent haven’t heard of it.

We hope you can leverage these data and insights to better understand and advise your small business clients around tax planning and preparation for the coming tax season. To help your small business clients build confidence for the coming tax season, consider extending an invitation to them to join Intuit’s free “Small Business Taxes” webinar on Wednesday, Dec 5, 2018, 10 – 11 a.m. CDT, with David Williams, CPA, Beverly Lang, and tax attorney general Eric L. Green.

Sample information: 600 small business owners, accountants and bookkeepers (age 18+) from businesses throughout the U.S. with 20 employees or fewer. The survey was commissioned by TSheets for QuickBooks Payroll in November 2018. A statistically significant sample of survey respondents was independently provided by Pollfish.