How do you handle your outfit and taxes can make a big difference in your success as a small business owner. Make sure you avoid these common tax mistakes small business owners make:
1. Choosing the wrong type of business.
When you go into business, everyone seems to have advice on how you configure it. Some people think that everyone should have a company, and will be happy to help set up - for a fee. Other people recommend Subchapter S Corporations, partnerships or sole proprietorships.
The truth is, any form of business is perfect for everyone.
For example, a sole proprietorship, which reports revenue and expenses in Appendix C attached to your Form 1040, requires no configuration with the IRS and the less record keeping.
However, you can limit your exposure to liability of a limited liability company (LLC) (but not always as much as you might think). Regular company looks awesome, but you can pay the highest total tax if you are not careful.
Do your homework or get professional advice and start with the simplest form of business that meets your needs.
2. Wait until tax time to catch up on record keeping.
It's easy to keep all your receipts and other documents in a box somewhere, or in a folder on your computer and drag them all at tax time. But this is not the best use of your time and effort, for several reasons.
It takes longer to get organized when you have to do everything at once. It is also more difficult to remember what you spent, which means that you might miss something. If you wait almost until the deadline, you will feel squeezed.
The best reason not to wait until the end of the year to catch up on record keeping, however, is that by keeping good records and paying attention to them, you can use the information you learn to better tax planning - not to mention better business strategies
3 .. Get behind on tax deposits and estimated tax payments.
Small businesses are often pinched for money, especially in the early years. A surprising amount of gross revenue should be away from self-employment tax, income tax, and deposit tax on payroll. If you get behind on all or part of these tax deposits and estimated payments, it can be very, very difficult to let go.
A fail-safe strategy is to put money for taxes in a separate account as soon as you receive it, so you know tax money is still coming from gross income to which it applies.
4. Pay employees as independent contractors, or "under the table".
Payroll taxes are a problem. They are also expensive. Would it just be easier to pay people working for you as independent contractors instead of registering them as employees? Or better yet, just give them money?
Before taking the easy route, thinking of the consequences. Government agencies and other IRS has rules about who is an employee and who is not.
If you pay people as independent contractors, and the IRS determines that they were working under your control and should have been considered employees you. could end up paying back taxes and penalties
paying people in cash "under the table" encourages them to evade the income tax - not a good thing. And you may lose your deduction of business tax.
5. Missing on deductions and other tax benefits.
You can lose the benefit of business deductions in many ways. You can lose revenue, of course, and not get the deduction at all. You can forget to track your mileage company car. You may not know energy credits, or tax benefits for education linked to employment.
Another way you can miss out on all the tax benefits of your business is to take certain deductions as itemized deductions, instead of your business.
For example, if you pay the property tax on the property of the business, you must take the deduction with your business, not in Annex A.
taking as a business deduction, you save on self-employment tax and the income tax. You also reduce your adjusted gross income, which can help you benefit from other tax advantages.
To avoid running on deductions and other benefits, try to organize your outfit. Make it as easy and as automatic as possible. online applications, banking and credit card downloads, for example, can improve accuracy and make keeping records easier.
In addition, try to answer all questions, step by step in TaxAct when preparing your tax return. The program is designed to help you get all the tax benefits you are entitled to your business.
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