It's Not Just the Money

Taxes not only are a pain, they’re a drain on the resources of small businesses.

That’s the message from a new survey of National Small Business Association members. Nearly 40 percent of these small businesses spend more than 80 hours a year dealing with federal taxes. About 50 percent of the small businesses surveyed spend more than $5,000 a year on administration of federal taxes, including accounting fees. That doesn’t even count the taxes themselves.

These numbers also don’t include compliance with state and local taxes, which rank just behind payroll taxes as the most burdensome taxes for small businesses.

Payroll services are used by 44 percent of these NSBA members, which tend to be older and more established than small businesses at large. Payroll taxes eat up a lot of time, even at firms that use outside services: 28 percent of these small businesses spend six hours or more a month dealing with payroll tax administration.

This burden is going to get worse for some businesses. Beginning next year, businesses with more than 250 employees will have to report the cost of their employer-sponsored health insurance on their employees’ W-2 forms. This reporting is optional for smaller firms, at least for now. The NSBA survey found that most small businesses say that requirement would have a negative impact if it applied to them.

Supporters of health care reform tout the health insurance tax credit that is available to some small businesses—those with fewer than 25 employees with average wages below $50,000. But only 10 percent of NSBA members say they qualify for this tax credit. More than 60 percent aren’t sure. This lack of knowledge about the tax credit is one reason why another small-business organization, Small Business Majority, is partnering with the Small Business Administration this week for a series of webinars on this tax break.

The survey also demonstrates why small-business owners are so relieved that Congress recently repealed another provision of health care reform: the requirement to file a 1099 form with the Internal Revenue Service any time they spend more than $600 a year with any other businesses. Previously businesses had to file 1099s only for unincorporated service providers. Under the old requirement, NSBA members filed an average of only 16 1099s a year. Under the health care reform bill’s expanded requirements, they would have had to file an average of 178 a year.

The survey also found that fear of IRS audits makes small business owners leery of using the home office tax deduction. Less than half of the small businesses eligible for this break use it, the survey found, mostly because they fear doing so would send a red flag to the IRS. This fear is costing small business owners money: Survey respondents who did take this tax break reported an average home office deduction of $4,557.

NSBA members would rather have a simpler tax system that had lower rates and fewer deductions. The survey found that 60 percent favor eliminating both corporate and individual income taxes, and instead adopting a 23 percent national sales tax, a proposal known as the Fair Tax. Rebates would be available for low-income Americans.

“The time for a serious debate on broad tax reform is now,” said NSBA president Todd McCracken. “The ever-growing patchwork of credits, deductions, tax hikes, and sunset dates is a roller-coaster ride without the slightest indication of what’s around the next corner. This is unsustainable and unacceptable.”

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Kent Hoover is the Washington bureau chief for bizjournals.