As a small business owner, one of the most important aspects of your success is how you handle your record-keeping and taxes. Unfortunately, many small business owners make common tax mistakes that significantly impact their bottom line. Here are some of the most common mistakes to avoid:
Choosing the wrong form of business
When starting a business, choosing the right form of business is critical. Each form of business is taxed differently, so it's essential to do your homework or seek professional advice. Sole proprietorship is the simplest form of business that requires no setup 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). However, LLCs don't always provide as much liability protection as you think, so consider all the pros and cons before choosing.
Waiting until tax time to catch up on recordkeeping
While bookkeeping can be a pain, keeping everything organized is worth it. Waiting until the end of the year to catch up on recordkeeping can lead to mistakes and missed deductions. You'll likely feel rushed, and the accuracy of your tax return may suffer. Keep good records, pay attention to them throughout the tax year, and use the information you learn to plan better tax and business strategies.
Getting behind on tax deposits and estimated tax payments
Small businesses often struggle with cash flow in their early startup years. However, it can be challenging to catch up if you don't deposit taxes or make estimated tax payments. A great strategy to avoid this is to put money for taxes in a separate account as soon as you receive it.
Paying employees as independent contractors or "under the table"
While payroll taxes can be expensive, it's important to classify your workers appropriately as employees or independent contractors. Failing to do so can result in penalties and back taxes. Paying your employees "under the table" is illegal and encourages tax evasion. It's essential to keep accurate records and pay your workers appropriately.
Missing out on deductions and other tax benefits
Small business owners often miss out on valuable tax deductions and benefits. Common reasons include losing receipts, forgetting to track business vehicle mileage, or not knowing about tax perks for job-related education. It's essential to keep accurate records and work with a tax professional who can identify all the potential deductions and benefits available to you.
In conclusion, keeping your business organized and understanding tax rules and regulations are crucial to your success as a small business owner. Avoid these common tax mistakes and work with professionals to maximize your benefits, minimize your tax liabilities, and grow your business.