There aren’t many business requirements that are as confusing and stressful as taxes. While it is true that there is no “one size fits all” tax strategy that is going to work for every business owner, there are certain common mistakes all new business owners should be aware of and be careful to avoid.
Procrastinating Until The End Of The Year
Nobody wants to deal with their taxes until they have to, but one of the most common pitfalls new business owners make is putting off dealing with their taxes until the end of the year. Managing taxes for your business is a year-round process. Being proactive and keeping track of your expenses right from the start can help you maximize your deductions. Remember that every expense, from purchasing office supplies to hiring staff, can have an impact on your taxes.
Not Keeping Good Records From Day One
Develop a bookkeeping system right from day one to keep track of your receipts, bills, and other documents, and be sure to keep your personal finances separate from your business. You should know what is my tax id number that is separate from your social security number. Documents stored on your computer should be saved in clearly marked folders. Everything should be kept in one place and kept up to date. Using spreadsheets is ok when you first start out, but as your business gets bigger, it’s best to utilize a bookkeeping software like QuickBooks or FreshBooks. Poor bookkeeping can lead to some grave mistakes at tax time. You don’t want to be trying to estimate numbers at the end of the year or missing out on potential deductions.
Not Looking At The Whole Picture
Don’t forget to look beyond just your income tax. Stay on top of sales and payroll taxes throughout the year as well, especially if your company works or sells products in multiple states. Payroll taxes can be especially challenging because there are different approaches for companies that hire independent contractors and regular employees. Many people don’t know that sales and payroll taxes can affect their income tax liability or that they can trigger an audit if they aren’t paid properly.
Not Hiring Professional Accounting Help
Tax requirements for small businesses are complex and confusing and they are constantly changing. Don’t wait until it’s time to do your yearly taxes to hire a tax professional. You should work with a tax professional, such as a financial outsourcing firm, throughout the year, not just at tax time. A tax professional can help you strategize and adjust things as you go along so you’re not blindsided at the end of the year. Bring in a financial consultant early and communicate with them at least a monthly basis.
Reporting Your Income Incorrectly
Over-reporting or under-reporting your income is a sure way to get flagged for an audit, or worse yet, you could even face fraud charges. Obviously, the average Joe is not going to misrepresent himself on purpose, but mistakes can happen. When you file your taxes, the IRS is going to compare the amount of income your report versus the amount of payments that have been reported as made to you. If these two amounts don’t match up, you may be asked to present your financial records in order to help clear up the discrepancy. Be sure to keep detailed, up to date records of all payments you receive to avoid making mistakes when you report your income.
Not Claiming Deductions You Are Eligible For
Again, your best bet is to hire a tax professional to help you find all the deductions you’re eligible for. For example, did you know that many startups can deduct up to $5000 in start-up costs? Whether it’s daily printing costs or the costs of running a home office, there are several deductions you may be eligible for, and there’s no reason you should miss out on deductions you’re eligible for. Every penny counts when you’re just starting out! However, it’s also important not to overdo or exaggerate your deductions either. If your deductions are a lot higher than what’s considered typical for your industry, the IRS might decide to take a closer look.
Paying or Filing Your Taxes Late
Paying or filing late is one of the costliest mistakes you can make. You need to follow the 1099 deadline as well as your business filing deadline. Even if you file for an extension you will still face penalties that can stack up surprisingly quick. Making a payment arrangement with the IRS can help to lessen the problem, but you will be far better off if you pay estimated quarterly payments in advance instead. You never know, you could even end up getting a refund if you overestimate on your quarterly payments.
Not Choosing The Right Structure for Your Company
Choosing the legal structure of your business is one of the most important decisions you will make when starting out. This decision will directly affect the amount you pay in taxes, how much paperwork your business will need to do, and determine your personal liability if the business is not successful. Consider this decision carefully and consult with a financial professional for advice. There’s a lot to consider when making this decision. For example, you can avoid pitfalls like double taxation by structuring your company as an S corporation. Or, a sole proprietorship could be a good option if you own 100% of the business because it’s cheaper and requires less paperwork. Just be sure to purchase a good insurance policy to protect your personal liability. Another option worth considering is a limited liability company, or LLC. This business structure protects your personal assets while offering many of the same benefits that an S corporation does.
As a business owner, tax planning should be a priority all year round. When it comes time to file your taxes, if your documents and receipts aren’t organized and you haven’t kept good books, you will turn an already stressful process into a nightmare. Hire a tax professional today and stay in touch with them regularly to avoid headaches down the road.