10 Tax Mistakes to Avoid in Small Business

Taxes are a significant consideration in any business endeavor; you likely know it's not simply adding and subtracting. Small business owners frequently make mistakes in the early years of their business due to the lack of proper accounting procedures. Unfortunately, these mistakes can impede the growth of their businesses.

Here are ten common mistakes that every small business owner should try to avoid.

1. Selecting the Wrong Form of Business

Selecting the wrong form of business always becomes a hurdle with filing taxes. There is no one correct form of business to advise because every business is unique in its operations and what it entails. While setting up a business, owners usually try to get the company up and running quickly and miss the small details. Most frequently, only a quick glance at the registration form occurs, which may seem right at the time, but it is often not because there is not a clear grasp of the associated tax liabilities and benefits. Only when business owners file their tax returns or apply for a loan, do they realize that they have set up the business incorrectly.

For instance, a sole proprietorship reports income and expenditures on a 1040 form. This type of business structure does not need to be set up with the IRS and includes the least amount of recordkeeping. But on the other hand, if you are interested in limiting your exposure to liability, you might choose a limited liability company (LLC). And while a regular corporation may seem intriguing, it might require you to pay higher total taxes in the long run. But, as we all probably agree, the fewer taxes, the better.

2. Not Utilizing Software or Cloud Technology 

All of your bookkeeping needs, including payroll and budgeting, can be handled automatically with software. This results in a quick turnaround, giving you more time to devote to the more crucial tasks, like managing your business.

Many CPAs and accountants praise the effectiveness of Microsoft Excel. Excel is not as sophisticated and interactive as any reliable accounting software, but it's essential to be aware of this. Excel, for instance, cannot possibly check for human errors. Accounting programs, like Quickbooks Online, can take information directly from the accounting program and transfer it to tax software thus saving time and costs on the tax return process.

3. Waiting Until Tax Season to Get Caught Up with Recordkeeping

I think we all know bookkeeping can be a pain. While shoving away your receipts and records may be tempting to forget about them until tax time, it's not a good practice. This method probably hinders your potential to claim the small business tax deductions you should receive. So, even though bookkeeping might be intimidating and tedious, it is very beneficial for your business to keep everything organized.

4. Taking Unlawful Deductions

The IRS requires evidence that an expense was a legitimate business expense, and there are restrictions on how much you may write off for specific things. These requirements are in addition to having information on average spending trends. It only takes the proper paperwork to support a claim, and understanding the most recent tax laws is necessary to file for the correct amount. Working with the appropriate tax expert in this situation can make all the difference. Keep in mind that the three most reviewed items are home office, car, and travel expenses.

5. Getting Behind on Tax Deposits and Tax Payments

It's preferable to file late rather than not at all if the deadline eludes you or you're waiting for that one deal to conclude. The IRS can see you even if you attempt to act like it can't, just like your mother has always been able to. The fines you incur for filing late or not at all will keep adding up until you find a solution. Penalties and interest will be assessed on top of what you are required to pay which can in some instances double your tax bill.

6. Paying Employees as Independent Contractors or “Under the Table”

Taxes on salaries can be a nuisance. They are also pricey. You might conclude that paying your personnel as independent contractors rather than hiring them as employees would be more straightforward. Or even better, why not just give them cash?

There is nothing wrong with paying freelancers or independent contractors to work on your company's behalf. However, the IRS and other governmental organizations have regulations concerning who qualifies as an employee. For instance, you can be liable for unpaid taxes and penalties if the IRS finds that someone you paid as an independent contractor actually worked for you and should have been classed as an employee.The 3 important factors, according to the IRS are:

1. Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

7. Missing Out on Deductions and Other Benefits

There are a lot of different ways to overlook company deductions. For example, you might neglect to keep track of the mileage on your company vehicle, or you might be unaware of any possible energy credits or tax benefits for continuing your education.

You can reduce income and self-employment taxes by deducting this as a business expense. Additionally, you can reduce your adjusted gross income (AGI), which may allow you to be eligible for additional tax breaks. Some deductions that small businesses often miss out on include the following: startup costs, interest on loans, continuing education, and inventory.

8. Mixing Business and Personal Expenses

If your company is considered a corporation, it is considered a separate entity. Its finances must be kept separate to preserve the corporate veil that safeguards your personal assets. For example, suppose you have a sole proprietorship business structure. You are liable for all of the company's debts, losses, and obligations, in addition to being entitled to all of its profits. However, you should keep your personal and business funds separate because you would be required to prove your all expenses (even if personal) and income during an audit.

9. Trying to Use Only the Cheapest Methods

Continuously looking for ways to do business at the lowest possible cost may cost you more money overall. For instance, you can decide to engage a bookkeeper with the lowest rate because it initially appears to be the least expensive and best course of action. But what if your payroll taxes are frequently incorrect, making it impossible for you to complete the application by the deadline?

The old phrase, "You get what you pay for," is generally accurate. Spend more to get more quality in your work. Spending more money in certain areas might even save you money in others. At Fleming & Associates, LLC, all bookkeepers worked is reviewed by a CPA.

10. Thinking You Can Do it Alone

Doing taxes for your small business takes time and patience. As a small business owner, plenty of items are on your plate. Spending time and energy on other parts of your business might be more valuable to you. There is no shame in hiring someone to support you, especially if that person might even save you money. For a quote on bookkeeping services email us at bonnie@flemingandassoc.com.