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6 Big Tax Mistakes Small Business Owners Make

Business Finance Business Planning Small Business Taxes
A small business owner researches common tax mistakes businesses make on her tablet

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Updated for tax year 2023.

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 to set it up. Some people think everyone should have a corporation, and they will happily help you set one up — for a fee. Other people may recommend S corporations, partnerships, or sole proprietorships.

The truth is, no form of business is perfect for everyone. Each business structure handles taxes a little differently. For example, a sole proprietor reports business income and expenses on Schedule C attached to their individual Form 1040. This business structure requires no setup with the IRS and the least amount of recordkeeping.

On the other hand, if you want to limit your liability exposure, 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. It’s often 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 filing rolls around, it’s rarely in your best interest to do so. In fact, unorganized or poor recordkeeping may hinder your ability to claim all the small business tax deductions and tax credits you qualify to receive.

So, while bookkeeping may not be glamorous, going through the effort to keep everything organized is worth it!

For one thing, 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 for better tax planning — not to mention better business strategies. Win-win!

3. Not separating your business expenses and personal expenses

Speaking of recordkeeping … don’t make the mistake of failing to separate your personal and business finances. Having a separate bank account and credit card for your business expenses is good practice to help streamline the tax preparation process.

Keeping these records separate is a good idea for multiple reasons. It helps you more quickly determine which business tax breaks you qualify for, protects your personal liability, and can even help you build good business credit.

4. 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 tough to catch up again.

One fail-safe strategy is to put money for taxes in a separate bank account as soon as you receive it. This way, you know the money for taxes always comes from the gross income to which it applies.

5. Paying employees as independent contractors or under-the-table

Payroll taxes can be expensive and a hassle. You may think it would be easier to pay your workers as independent contractors instead of 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. However, the IRS and other governmental agencies have rules about misclassifying employees, and you must abide by them.

For example, you could owe back taxes and penalties 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.

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.

6. Missing out on deductions and other tax benefits

There are so many ways to miss out on business tax deductions. You can lose receipts, forget to track your business vehicle mileage, or you may not know about potential energy credits or tax perks for job-related education.

One common mistake is taking certain deductions as itemized deductions instead of as a business expense, which can cause you to miss out on tax benefits. For example, if you pay property tax on business property, you should take the deduction with your business, not as an itemized deduction 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. For example, online apps, banks, and credit card downloads can improve accuracy and make recordkeeping much easier.

Lastly, when you file your taxes, try to answer all the step-by-step questions in TaxAct® when you prepare your tax return. Our program is designed to help you find the business tax benefits you are entitled to, so don’t rush the process. You work hard every day to keep your small business up and running — let us do the hard tax work for you.

This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.

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