Starting and running a business requires precise attention to detail—especially when it comes time to file your business taxes. Whether you head a startup with a few employees or you’re an independent contractor, taxes are a common pain point for entrepreneurs. Tax law is complex, and penalties for filing mistakes can affect a business’s bottom line.
Avoiding tax mistakes is crucial for entrepreneurs—and if you don’t have the capital to hire a tax professional, you should know some of the most common mistakes that entrepreneurs make.
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Common business tax mistakes and how to avoid them
Doing it yourself
First and foremost, if you do have the resources to hire an accountant or tax professional, do so. If your taxes look complicated to you, it’s because they often are complicated. The only way to be sure you’re filing correctly and getting the best refund for your business is to work with an expert who understands your finances.
Many accountants also offer audit insurance—so if the IRS does audit you, you’re not liable for additional payments to the accountant.
Of course, hiring a tax expert isn’t within the budget of every entrepreneur, but it’s worth stating up front: The best way to avoid making tax mistakes yourself is by entrusting the job to an expert.
Forgetting to file or misfiling paperwork
Now that we have that out of the way, let’s address the common DIY mistakes.
As you know from previous tax seasons, the IRS deals with many, many forms. Whether you have a few full-time employees, frequently employ contractors, or you are a contractor yourself, there are myriad forms for different types of employment.
To simplify, let’s break this down between startups and contractors:
Startup paperwork
Businesses have to pay employment taxes annually. If your business doesn’t have the cash on hand to pay taxes or misses the deadline, you may incur a failure-to-file penalty that accrues until you file your return.
Don’t let an inability to pay your taxes turn into a penalty. You can apply for a filing extension using Form 7004 and pay what you can upfront. From there, you can use an installment plan to pay the rest.
If you primarily hire contractors throughout the year, it’s up to you to track who you hired and how much you paid them. If you paid any contractor more than $600, you must issue Form 1099-MISC to both the contractor and the IRS. Send Copy A of Form 1099-MISC to contractors by January 31 of the tax year, while Copy B should go to the IRS by February 28.
For every Form 1099-MISC you neglect to file, the IRS may fine you $100 per form. If you hired 20 contractors and failed to file each 1099, that’s $2,000 in fines. IRS computers also match the information reported on your returns with the information on your contractors’ returns, so make sure you’re reporting the same information to both the IRS and contractors.
Independent contractor paperwork
Contractors will likely have several 1099s from a number of clients. One of the most common mistakes contractors make is filing too soon. Keep track of every client who owes you a 1099, and hold off on filing until you have received each one. Filing too early means you’ll need to adjust later on, which will delay your refund or may incur penalties.
Another common oversight for contractors is on estimated tax payment deadlines. Because the IRS does not withhold money from their paychecks, contractors must make quarterly estimated tax payments by January 15, April 15, July 15 and October 15. This estimated tax calculator will help you figure out what you owe.
Related: Incorporate Your Business Through StartupNation
Choosing the wrong business structure
In the United States, businesses are categorized as limited liability companies (LLCs), partnerships, S corporations, C corporations and sole proprietorships. The most common entities for small businesses and individual entrepreneurs are S corporations, partnerships and LLCs.
There are important differences between business entities that you should consider before launching your business. The right business entity will affect how you file your taxes, how much you pay, and even your liability in legal scenarios.
If you’re an individual, you should likely file as a sole proprietor or LLC. Small businesses with a few employees or those that frequently hire contractors should probably file as S corporations. C corporations make sense for businesses that receive substantial outside investment, but they will also have a higher tax liability.
You’ll want to research the advantages and disadvantages of each type of business entity to figure out what’s right for you. Filing as the wrong entity may create expensive problems for you down the line.
Poor recordkeeping
Unless you’re carefully planning for tax season, you may end up paying more than you expected. It’s easy to say, “I’ll deal with tax season when it gets here,” but you should be thinking about it all year long.
Keeping accurate books and records of your business spending is crucial to filing correctly. Shoddy bookkeeping can lead to missing out on tax deductions. In the event of an audit, that poor recordkeeping may make you forfeit legitimate deductions because you can’t provide proof of them, and will wind up costing you more money. Keeping receipts for expenses, payroll, sales and other business-related costs will help you capitalize on your savings come tax season and help you avoid penalties. Accounting software is a helpful tool in this regard.
That said, be sure to separate your business and personal expenses. The point of setting up a business entity is to shield you from personal liability if you’re ever sued by a client. However, attempting to claim personal expenses as deductible business expenses may forfeit that protection. Even if you pay for a personal expense with your business account and keep the receipt, it still counts as a personal expense.
To avoid the risk of mixing business and personal expenses, set up separate business checking accounts and credit cards. Come tax time, you’ll have a clear picture of your expenses because you’ll have divided your finances clearly between your accounts.
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Overlooking tax breaks
There are opportunities to lessen your business tax burden—you just have to know what they are. An accountant can help you maximize your refund by finding relevant tax breaks, but here are some of the most common ones that entrepreneurs miss or misunderstand:
- Over-reporting income: If you collect a sales tax on sold goods, your reportable income should not include the sales tax. Subtract the sales tax before reporting income.
- Forgetting carryovers: Some unused deductions and credits may roll over to future years. For instance, if you operated at a net loss last year and couldn’t claim any deductions, you may claim a deduction this year.
- Forgetting the home office deduction: Contractors who work from home can claim a deduction for operating their business from home. You can write off home office expenses either by deducting your actual expenses or using an IRS-set simplified rate.
Entrepreneurs should deduct every business-related expense. Otherwise, you’re just leaving money on the table come tax season. You should deduct things like meals for employees, bank fees, training programs and costs associated with research and development on new products.
Tax season is complicated, and many new entrepreneurs make mistakes. Whether you’re operating a small business or work as an independent contractor, it’s important to file correctly so you can claim the largest refund possible and avoid penalties. Now, you should have an idea of how to avoid the kinds of mistakes that often trip up your peers and competitors.
The post Dodge These 5 Common Tax Mistakes Entrepreneurs Make appeared first on StartupNation.
via https://www.AiUpNow.com/ by Eric Goldschein, Khareem Sudlow
