An economy relies heavily on taxes to support economic growth. Employees, professionals, and business owners, whether big or small, are required to file it and pay their corresponding tax liability.
For small business owners like you, handling your own taxes can be challenging, but making mistakes and paying more in the end is even worse.
And since taxation is part of doing business, there’s no escape from it. But you can make your life easier by being aware of the 10 common mistakes that small business owners like you make when doing taxes.
By reading this post, we will help you avoid falling victim to these common mistakes.
So, let’s discuss these things, and we will guide you on how to learn from those who have gone before you.
Failing To Plan Ahead
Having a sound plan for your business will more likely help you succeed. Sadly, while entrepreneurs may have all sorts of business plans in place, little or no importance is placed on having a tax plan.
What is tax planning?
Tax planning is the analysis of a financial situation or plan to ensure that all factors work together to allow you to pay the lowest taxes possible.
It involves taking into account the effects of recent and upcoming business decisions in an effort to legally reduce or postpone tax liabilities. This can provide you with additional money to utilize for investments in your company or for other purposes.
Your financial resources can be maximized, and you can make wise decisions that support your objectives by proactively managing your tax status.
So, to make sure you don’t have to learn these lessons the hard way, the aim is to plan the future of your business with taxes in mind. As the saying goes, “If you fail to plan, you are planning to fail”.
Inadequate Maintenance Of Records
Keeping thorough and adequate records is very important. Without proper record-keeping, it’s a challenge to accurately track and document expenses, income, and transactions.
This will impose increased legal and compliance risks, audit risks, and the risk of committing errors in your business, thereby resulting in penalties and charges.
You can also miss the opportunity to have an effective financial plan if your records are not complete.
Effective record-keeping techniques can help maintain compliance, reduce errors, and present a clear financial picture for your business. These practices include using accounting software, organizing receipts and invoices, and documenting all financial activities.
To mitigate these disadvantages, it’s essential to prioritize maintaining accurate and organized records.
Overlooking Eligible Deductions
Failing to claim eligible deductions can increase your tax liability since these deductions are subtracted from your taxable income, reducing the amount you owe.
Substantial tax savings will be lost, and it will cause inefficient use of your financial resources, hindering your ability to allocate funds to other areas of your business.
It can also draw unneeded attention from tax authorities and possibly result in further inspections and audits.
It’s critical to remain knowledgeable about the deductions that are available to you based on your personal or business circumstances if you want to avoid these drawbacks.
To be sure you are claiming all allowable deductions and maximizing your tax savings while remaining in line with tax rules and regulations, Compass CPA, your tax professional, is here to help!
Underestimating Estimated Tax Payments
If a business anticipates owing a particular amount in taxes, the IRS and state tax agencies compel them to make anticipated tax payments throughout the year. Underpaying estimated taxes can result in penalties and interest charges imposed by these tax authorities.
Underestimating your estimated tax payments can create a strain on your cash flow. You may face difficulty meeting your tax obligations when they are due if you fail to set aside a certain amount for them
It can also affect your budgeting and financial planning, increase audit risk, and limit your ability to invest in your business or pursue growth opportunities due to higher taxes.
It’s crucial to estimate your tax liability accurately and make timely estimated tax payments throughout the year to avoid these challenges.
Mishandling Employment Tax Deposits
Businesses must withhold and deposit payroll taxes, including federal income tax, Social Security tax, and Medicare tax, on behalf of their employees. Failing to submit these taxes on time or depositing them in the wrong amount can result in significant financial penalties and interest.
If the deposit requirements are not met, audits and investigations can be triggered. Non-compliance can result in legal consequences, reputational damage, and the potential for unpaid taxes and penalty liabilities.
Employers who willfully fail to remit employment taxes may be subject to the Trust Fund Recovery Penalty (TFRP). Tax authorities can hold individuals personally accountable for unpaid employment taxes under TFRP.
It is critical for companies to understand and abide by the rules for employment tax deposits in order to prevent these downsides. To guarantee precise and timely payroll tax deposits, be informed about deadlines and deposit schedules, and set up appropriate procedures and internal controls.
Filing Taxes Late Or Beyond The Deadline
Failing to file taxes by the tax deadline can result in penalties and interest charges imposed by tax authorities, delayed refunds or payments, and missed opportunities for deductions and credits.
When taxes are filed late, it takes more time and effort to compile all the required paperwork, finish the tax return, and handle any penalties or other issues that may arise. It could cause disruption and tension, taking your focus away from other important personal or business activities.
A late tax filing might harm your credit score and reputation, making it harder to obtain loans, mortgages, or other forms of credit in the future.
Neglecting To Differentiate Between Business And Personal Expenses
When business and personal expenses are combined, keeping track of spending accurately becomes challenging. It becomes difficult to effectively track and report business-related income and spending without sufficient separation. As a result, financial statements may be erroneous, it may be challenging to evaluate how well a business is doing, and there may be inconsistencies discovered during tax filings or audits.
Mixing personal and business spending makes it more challenging to recognize and deduct legal business expenses. It can distort the financial picture of the business, making it difficult to evaluate profitability, cost control measures, and overall financial health.
When it comes to tax audits, combining personal and business expenses might cause issues. If your financial documents are not distinct from one another, tax authorities may become interested and scrutinize your business’ finances more closely. This can take a lot of time and be unpleasant, and if there are errors, there could be additional fines or interest costs.
Treating Employees As Independent Contractors For Payment Purposes
Treating employees as independent contractors for payment purposes is a practice known as worker misclassification. It refers to the practice of designating workers who legally belong in the category of employees as independent contractors, often for the purpose of avoiding certain legal obligations and costs associated with employing individuals.
As workers, employees enjoy several benefits and protections. These include receiving a minimum wage, earning overtime pay, being eligible for workers’ compensation, having access to unemployment insurance, and having specific taxes withheld from their earnings.
Businesses may try to evade these commitments by misclassifying employees as independent contractors, but if caught, this can result in legal issues, fines, and back payments of missed salaries and benefits.
It is crucial for businesses to accurately classify their workers to ensure compliance with employment and tax laws. If you have concerns or questions about how to classify your workers, consult with Compass CPA today!
Choosing The Incorrect Accounting Software
To manage financial records and operations efficiently, businesses must select the appropriate accounting software. Choosing the wrong accounting software, however, can result in frustration, inefficiencies, and possible financial problems. In order to choose accounting software wisely, keep in mind the following factors:
Identify your business’s needs. Recognize your particular accounting needs first. Take into account elements including the size of your business, the difficulty of your financial transactions, the number of users who will require access to the program, and other requirements unique to your industry.
Research available options: To determine which software suppliers best meet your needs, conduct research and compare several options. Cost, usability, scalability, customer support, integration potential, and security aspects should all be taken into account.
Take advantage of trial periods or product demos. Many software vendors provide free trials or product demonstrations. Utilize these chances to test the software and assess its functions and user interface. You may have a better sense of how the product fits into your needs and workflow after some hands-on experience.
Consider scalability and future needs. Your accounting requirements could change as your business expands. It’s critical to select accounting software that can grow with your company and meet evolving needs.
Never forget that choosing the best accounting software is important for your business. To ensure you select the program that best meets your demands and advances your financial management goals, you must take your time, carefully consider your options, and assess your needs.
You can also seek professional advice and recommendations if you want. Just book a call or message us anytime!
Failing To Seek The Expertise Of A Tax Specialist
Failing to consult a tax specialist’s expertise might have significant consequences for businesses. Tax laws and regulations can be complex and dynamic, and breaking them may result in penalties, fines, or even legal issues.
It’s crucial to remember that while tax professionals can offer insightful counsel and assistance, the responsibility of upholding tax rules ultimately rests with the business owner.
By seeking the expertise of a tax specialist, you can ensure that your business remains compliant, takes advantage of available tax benefits, and reduces the risk of costly mistakes or penalties.
Wrap Up
Small business owners frequently make simple errors while managing their own taxes, which can have negative financial and legal consequences. By being aware of and avoiding these mistakes, business owners can save time and money and lessen the likelihood of fines or audits.
Additionally, small business owners can more successfully negotiate the complexity of tax duties, lower their risks, and spend their financial resources wisely by avoiding these common mistakes and seeking professional advice when necessary.
