How you handle your record-keeping and taxes can make a big difference in your success as a small business owner. Make sure to avoid these common tax mistakes small business owners make:
1. Choosing the wrong form of business
When you go into business, everyone and their uncle seems to have advice on how you should set it up. Some people think everyone should have a corporation, and they will happily help you set it up — for a fee. Other people recommend Subchapter S Corporations, partnerships, or a sole proprietorship.
The truth is, there is no form of business that’s perfect for everyone. Each business structure handles taxes a little differently.
For example, a sole proprietorship reports income and expenses on Schedule C attached to your Form 1040. This business structure requires no set up with the IRS and the least amount of recordkeeping.
On the other hand, if you want to limit your exposure to liability you might choose a limited liability company (LLC) — although LLCs don’t always limit liability as much as you might think.
And while a regular corporation may seem impressive, it might require you to pay higher total tax if you’re not careful. None of us want that.
When it comes to choosing your business structure, make sure to do your homework or seek professional advice. Often times, it’s best to stick with the simplest form of business that meets your needs.
2. Waiting until tax time to catch up on recordkeeping
We get it, bookkeeping can be a pain. But while it may be tempting to shove all your receipts and records in a folder and forget about them until tax time, it’s rarely in your best interest to do so. In fact, this method may be hindering your potential to claim all the small business tax deductions you qualify to receive.
So, while bookkeeping may not be glamorous, going through the effort to keep everything organized is worth it!
It takes much longer to get organized when you have to do it all at once. It’s also harder to remember what you spent, meaning you could miss something (and possibly miss out on a bigger tax refund). If you put off organizing your records until the deadline, you’ll feel rushed, and the accuracy of your tax return may suffer.
We know it’s difficult, but try not to wait until the end of the year to catch up on recordkeeping. By keeping good records and paying attention to them throughout the tax year, you can use the information you learn to for better tax planning — not to mention better business strategies. Win-win!
3. Getting behind on tax deposits and estimated tax payments
Small businesses are often pinched for cash, especially in the early startup years. A surprising amount of gross receipts should be tucked away for self-employment tax, income tax, and payroll tax deposits. If you get behind on any or all of these tax deposits and estimated payments, it can be very, very difficult to catch up again.
One fail-safe strategy is to put money for taxes in a separate account as soon as you receive it. This way you know the money for taxes is always coming from the gross income to which it applies.
4. Paying employees as independent contractors or “under the table”
Payroll taxes can be a hassle. They’re also expensive. You may find yourself thinking it would just be easier to pay your workers as independent contractors instead of signing them up as employees. Or better yet why not just pay them in cash?
There’s nothing wrong with paying independent contractors or freelancers to do work for your business. But the IRS and other governmental agencies have rules about who must be considered an employee, and it’s important you abide by these rules.
For example: If you paid someone as an independent contractor and the IRS determines they worked under your control and should have been classified as an employee, you could end up owing back taxes and penalties.
Always make sure you’re paying your employees and contractors appropriately as well. Paying people “under the table” encourages them to evade income taxes, which has a negative ripple effect throughout the economy — not a good thing for anybody. Plus, if you do so, you may lose out on claiming a valuable business tax deduction.
5. Missing out on deductions and other tax benefits
Speaking of missing out on tax deductions …
There are so many ways to miss out on business deductions. You can lose receipts, of course, and not be able to claim the deduction at all. You can forget to track your business vehicle mileage, or you may not know about potential energy credits or tax perks for job-related education.
Another way you can miss out on all the tax benefits from your business is to take certain deductions as itemized deductions instead of with your business.
For example, if you pay property tax on business property, you should take the deduction with your business, not on Schedule A.
By taking this as a business deduction, you save on self-employment tax as well as income tax. You also lower your adjusted gross income (AGI), which can help you qualify for other tax benefits.
To avoid missing out on deductions and other benefits, try to organize your recordkeeping. Thankfully, there are services that can help make this as easy and as automatic as possible. Online apps, banks, and credit card downloads, for example, can improve accuracy and make recordkeeping so much easier.
Lastly, when you go to file your taxes, try to answer all the step-by-step questions in TaxAct® when you prepare your tax return. The program is designed to help you find the tax benefits you are entitled to from your business. You work hard every day to keep your small business up and running — let us do the hard tax work for you!