Taxes are pretty low on the list of exciting things you get to do as a small business owner. Most entrepreneurs would rather focus on building client relationships and creating a strong company culture over balancing the books and preparing their taxes.
But, these less exciting tasks still need to get done – and they need to be completed correctly. You can’t afford to cut corners or make a bunch of mistakes on your small business taxes. This will only add to the things you have on your plate and it can even affect your employees’ taxes and personal finances, too.
Thankfully, doing taxes isn’t as intimidating as it seems. The key to filing correctly is to learn about how each part of the process works and to watch out for silly mistakes. It wouldn’t hurt to have a professional help you figure it all out, either.
As far as mistakes go, here are 7 things you need to make sure you don’t do come tax season.
1. Playing Catch-up with the Books
Keeping up with the books all 365 days of the year makes the filing process much easier on you once tax season rolls around. Otherwise, you’ll be spending the majority of your time tracking how your cash came in and out rather than calculating how much you owe the IRS.
Don’t forget to track depreciation and inventory, too. The more attention to detail you pay to all of your assets throughout the year, the better prepared you’ll be to file your taxes.
Plus, keeping an eye on things will give you a deeper understanding of how your business’s finances work. It chips away at some of that intimidation you may feel when it’s time to start crunching numbers for tax purposes. It also puts you in a good position to start paying taxes quarterly rather than annually.
2. Overlooking or Misusing Deductibles
A major part of crunching numbers is calculating deductibles. These are a huge help to your taxes; deductibles cut back on the total amount you have to pay back to the IRS.
You need to be aware of what your money-saving opportunities are and how deductibles relate to your business year-round. However, you shouldn’t try to manipulate the deductibles that you do have available to you.
Misusing the expenses that you’re able to write off can cause you more trouble than the “savings” are worth. You can end up being audited by the IRS and pay a significantly larger amount in fines and penalties than if you had just followed the rules.
Overlooking deductibles, on the other hand, won’t lead to penalties. But, you could end up paying more than you actually need to if you don’t take everything into account.
3. Deducting All Startup Costs
Keep in mind that deductibles may have conditions attached to them. For example, startup costs can only be deducted from your taxes to a maximum of $5,000. Everything beyond that limit cannot be written off.
There are other deductible rules to pay attention to, but this is one of the bigger write-off mistakes that new entrepreneurs make. It doesn’t matter whether you launched an e-commerce store or a new restaurant – you can’t write off more than $5,000 in startup costs.
4. Not Paying Employee Income Taxes
Another issue that often arises for small business owners is the payment of employee income taxes. You need to have a thorough understanding of how income taxes work and the role you play in them.
These aren’t just automatically taken out of a W-2 employee’s paycheck. At least, not from your standpoint. It’s your responsibility to pay withholding amounts and employer-paid taxes. Withholding amounts relate to things like income tax, social security, and Medicare, whereas employer-paid taxes cover unemployment tax.
There’s also the matter of matching the social security and Medicare withholdings.
5. Misidentification of Employees
Maybe your mistake isn’t just that you’re not paying employee income taxes, but also that you’ve misidentified your employees. This is a danger that cash-only businesses or those with contractors can run into.
Speaking of contractors, be careful not to represent your W-2 employees as independent contractors. The IRS will easily catch you, and you’ll end up in a bigger mess than if you had just paid your taxes the right way.
6. Forgetting About State Taxes
The next tax paying mistake to watch out for is the payment of state taxes. That’s right, as if federal payments weren’t bad enough, you may also have to give some money directly back to the state.
This rule doesn’t apply in Florida, although it can affect anyone who may be filing out of Utah. If your business operates in multiple states, you may have to pay funds in each of the local governments where the state tax rule applies. Make sure you have a thorough understanding of what each of your offices/operating locations is obligated to pay.
7. Mixing Business and Personal Finances
The final mistake to avoid when filing small business taxes it to mix personal finances with business papers. There are very few instances where an individual can file just one set of taxes as a small business owner. Most of the time, entrepreneurs have business taxes to file and personal taxes, too.
The best way to go about this is to keep separate records of your cash flows.
More so, be careful of writing off personal purchases on company paperwork. Don’t use company funds for personal needs at all throughout the year, and don’t write off personal purchases as business expenses. This will make filing much easier when the time comes.
Get Your Small Business Taxes Just Right
It’s one thing to read about the do’s and don’ts of small business taxes, and another to make sure you have all your bases covered. You want to avoid penalties and fines as much as possible, but you should also have the peace of mind that you don’t pay more to the IRS than you actually need to.
Not sure how to get everything just right?
Don’t worry, all you have to do is pick up the phone and contact a professional to help you figure it all out. Contact us today to get the support you need when filing your taxes this year.
