Business is not an easy-money-making activity, it must be lived at the best way to make it a successful one. Business owners, human as they are, still susceptible to making mistakes in managing and decision making.
Tax is also another financial hurdle to take and must be followed by everyone, otherwise, you will be penalized. Yes, there's no escaping from taxes. Business owners must stop falling from the pit of business tax blunders.
1. Mixed up business and Personal Finances
Small business funding app Fundbox once said, “If your business is a corporation, it’s considered a separate entity and finances must be completely separate to maintain the corporate shield that protects your personal assets. If you have structured your business as a sole proprietorship, the business is not a separate entity: You are entitled to all its profits and are also responsible for all of its debts, losses, and liabilities. Still, business and personal finances should be separated because, in the event of an audit, the burden of proof is on you to prove your business expenses and income.
Yes, business is a separate entity and must be checked and balanced independently and free from personal interests. Mixed up finances will cause you headaches, unbalanced financial reports, and it might lead to business losses and failures.
2. Better Understanding of Payroll and Employer Taxes
Submission of financial reports to the federal state and local tax authorities is one of the processes in paying taxes. Owners must make sure to report the things correctly and properly the appropriate labor records. Use an employee scheduling software. When I Work offers a free employee scheduling app to track hours and overtime properly.
Federal and state payroll taxes are broken down into withholding amounts and employer-paid taxes:
Withholding amounts include money that is deducted from a worker’s wages to pay for income tax, social security, and Medicare (also known as FICA taxes). Deductions are done every scheduled payroll, and employers must remit to the proper tax authorities on a regular basis. The schedule you follow depends on a number of variables.
Employer-paid taxes are taxes that must be paid by employers entirely, such as federal (FUTA) and state unemployment insurance (SUTA). Employers are mandated to contribute to social security and Medicare of their employees and they must also report and remit these amounts on a quarterly basis. Good thing, these expenses can be deducted from your business taxes.
In case employer makes a mistake with their payroll and employer tax reports, the Internal Revenue Service (IRS) is willing to conduct investigations. But IRS has become more strict in small businesses’ payroll taxes and they will issue fines, perform audits and, in certain cases, instigate criminal investigations. Small business owners must be cautious and careful in making their financial reports to avoid being penalized.
3. The difference between Contractors and Employees
Employee classification will also impact the deductions you claim on your business taxes, as the costs of contract labor are deductible as are employer-paid payroll taxes. You don’t have to deduct any withholding amounts or pay any employment taxes for a worker who is legitimately an independent contractor. For instance, a self-employed person you contract for services who manage their own withholding and tax amounts and does not receive benefits. If you misclassify an employee, it means you’ve had it incorrect for every paycheck you’ve issued and it is subject to fines along with the headache of untangling this mess.
4. Don’t Claim Too Many Expenses
IRS requires proof that the expense was a legitimate business expense and sets limits to how much you can claim for certain items. Substantiating a claim is a matter of having the appropriate documentation and filing for the right amount requires knowledge of the current tax codes. Claiming too many expenses can raise a flag with the IRS and working with the right tax professional can make all the difference.
The three most reviewed items are:
CPA Practice Advisor writes, “Whether it’s for business travel, meals, and entertainment, printing supplies, or other usually legitimate deductions, the IRS computers are good at looking at what similar small businesses in an industry type spend on similar expenses.”
5. Don’t Miss Out On Valid Deductions
IRS penalizes employer and businesses that miss out on tax deductions you are entitled to. small businesses often miss out the following deductions:
6. Avoid Poor Recordkeeping
Proper recordkeeping process is a key to effectively documenting expenses and deductions. While going digital doesn’t mean ditching hard copies, especially if you’re ever audited. You must take note that the IRS recommendations vary depending on the kind of receipts filed.
A firm recommends that small businesses reconcile their accounting statements on a regular basis. “Not reconciling statements — or not reconciling in a timely manner — keeps possible mistakes on your account past a time when they can easily be resolved. Negative results of failing to reconcile statements could include paying more than you expect for goods or services, paying bank or finance fees you didn’t agree to or bouncing checks due to mistakes in company checking accounts.”
If financial statements are not regularly reconciled it may cause you to submit the wrong amounts or miss the deadlines altogether.
7. Don’t Choose The Wrong Legal Entity
The corporate structure you choose is a matter of what’s best for your business. This decision will affect the ways your taxes will be filed. Getting it wrong could mean a long and painful road to recovery.
For a small risky business or startup, it’s common to establish yourself as a sole proprietor or partnership. Although, as you grow, you may wind up paying too much in self-employed taxes and you could instead opt to structure yourself as a corporation.
Whether you’re a C Corporation, S Corporation or LLC that is taxed like an S Corporation, each one has specific tax implications. In her blog post, How To: Legally Structure Your Startup, Nellie Akalp, CEO & Co-Founder of CorpNet, provides the following example, “If I own 80% of an LLC, my share of the tax burden doesn’t necessarily have to be 80% of the taxable income. But if I own 80% of an S-Corp and that company makes $100,000 in taxable income, I will be taxed on $80,000 of income, even if I never withdrew a cent from the corporate bank account.” Meanwhile, C Corps are taxed separately according to specific tax brackets.
8. Filing Late or Not Filing at All
It is better to file late than not at all if the deadline sneaks by you or you are waiting for a deal to close. The longer you continue with this routine, the IRS will be more agitated with you. The IRS can see you even if you try to pretend it can’t. Any penalties you accrue by filing late or failing to file at all will continue to compound until you resolve the issue.
The IRS advises that you should, “File all tax returns that are due, regardless of whether or not you can pay in full.” If you are unable to pay the full amount, installment plans are available.
9. Avoid Working With the Wrong “Expert”
The IRS holds the business owner responsible for tax errors, regardless of who completed the filing.
Barbara Weltman, President, and Founder of Big Ideas for Small Business, Inc. notes, “Don’t use anyone who suggests that you hide income or take write-offs you know you aren’t entitled to — this is a tip-off that the preparer is shady. If the IRS catches the preparer, all the preparer’s clients may come under audit. And, by not using a good preparer, you may miss out on write-offs you’re rightfully entitled to.”
10. Use the Right Tools
The IRS cites the two biggest pitfalls for small business are poor record keeping and the failure to report all taxable income. The root of all evil (or many tendrils of pain and uncertainty) is maintaining proper documentation and ensuring that you comply with all applicable tax regulations.
For startup businesses, choose a software (accounting, expense, productivity, etc.) that will not only fit them today but will also suit their needs five years from now.
Choosing payroll software that suits your needs and will simplify the entire process. It will also help keep you in compliance with remitting and reporting your payroll taxes along with other key documentation.
John Rampton once said, “Accounting is not just a tool for entering financial data in order to fulfill state and federal tax regulations or to tell you how much money is in the bank. Instead, accounting is a powerful mechanism that provides answers to questions related to how a business owner’s strategic decisions are working or not working.”
One final recommendation: Make proactiveness your new best friend. Put the right tools and processes in place and do your best to keep yourself informed. Lastly, make sure that the person doing your taxes knows what they are and how to use them.
