The way you manage your taxes and record-keeping can have a significant impact on your performance as a small business owner. Look out for these typical tax errors that proprietors of small businesses make.

1. Choosing the wrong form of business

Everybody seems to have suggestions on how to set up a business when you go into it. Some believe that everyone ought to have a corporation, and they will gladly assist you in creating one, provided you pay them a price. S corporations, partnerships, and sole proprietorships might be suggested by others.

In actuality, not every type of business is ideal for every individual. Every type of business structure has a slightly different tax strategy. A sole proprietor, for instance, would file Schedule C, the business’s income and expenses, with their personal Form 1040. The least amount of documentation and no IRS setup are necessary for this type of business organization.

On the other hand, limited liability companies (LLCs) are an option if you wish to reduce your exposure to risk; however, LLCs don’t necessarily limit liability as much as you may assume.

Furthermore, even though a standard corporation could look impressive, if you’re not careful, you might have to pay more in taxes overall. That is not what any of us want.

Make sure to complete your research or consult an expert when selecting your business structure. Generally speaking, it’s advisable to remain with the most basic company model that suits your needs.

2. Waiting until tax time to catch up on recordkeeping

Bookkeeping can be a hassle. It’s rarely in your best advantage to throw all of your receipts and documents in a folder and forget about them until tax time comes around, despite the temptation to do so. Actually, you might not be able to claim all of the tax credits and deductions for small businesses that you are eligible for if your recordkeeping is disorganized or inadequate.

Therefore, even though bookkeeping isn’t glamorous, it’s still worthwhile to put in the effort to maintain things organized!

One reason is that organizing something all at once takes a lot longer. Not only is it more difficult to recall your spending, but you run the risk of forgetting anything and maybe losing out on a larger tax refund. Postponing record organization till the last minute will make you feel hurried and could affect the accuracy of your tax return.

We understand that it might be challenging but try not to put off catching up on recordkeeping until the end of the year. You may use the information you gain for better business strategy and tax preparation by maintaining accurate records and paying attention to them throughout the tax year. Win-win!

3. Not separating your business expenses and personal expenses

In relation to recordkeeping, avoid the error of failing to keep your personal and business finances apart. It’s a good idea to keep your business costs separate from your personal credit card and bank account in order to make tax preparation easier.

There are several reasons why it is a good idea to keep these records apart. It shields you from personal liability, speeds up the process of figuring out which business tax incentives you qualify for, and even helps you establish good credit for your company.

4. Getting behind on tax deposits and estimated tax payments

Small businesses frequently struggle with funding, particularly during their early years of operation. You should stash aside a surprisingly large portion of your gross receipts for income tax, payroll taxes, and self-employment tax. It might be difficult to catch up if you fall behind on any or all of these projected payments and tax submissions.

One way to be secure is to deposit tax money as soon as you get it into a different bank account. In this manner, you may be certain that the tax revenue is derived from the applicable gross income.

5. Paying employees as independent contractors or under-the-table

Payroll taxes can be costly and inconvenient. You might assume that paying the staff as independent contractors as opposed to employees would be simpler. Better still, how about you just give them cash?

Paying freelancers or independent contractors to complete tasks for your company is perfectly acceptable. You must, however, follow the IRS’s and other government agencies’ regulations regarding incorrectly classifying employees.

For instance, if the IRS finds that someone you paid as an independent contractor actually worked under your supervision and ought to have been considered an employee, you may be responsible for back taxes and penalties.

Always ensure that the money you pay contractors and staff is sufficient. Paying people “under the table” encourages them to avoid paying income taxes, which is bad for the economy as a whole and detrimental to individual taxpayers. Furthermore, you can miss out on a significant corporate tax deduction if you do this.

6. Missing out on deductions and other tax benefits

There are multiple ways to overlook tax deductions for businesses. It’s possible to misplace receipts, fail to record the mileage of your company car, or be unaware of possible energy credits or tax benefits for job-related training.

One frequent error that might cost you money in taxes is to claim some deductions as itemized rather than as company expenses. For instance, you should deduct property taxes paid on business property from your business income rather than itemizing them on Schedule A. You avoid paying both income tax and self-employment tax by deducting this as a business expense. Additionally, you reduce your adjusted gross income (AGI), which may enable you to receive additional tax advantages.

Strive to keep your recordkeeping organized and avoid missing out on deductions and other perks. Fortunately, there are services available to assist in making this process as simple and seamless as feasible. For instance, credit card downloads, banks, and internet apps can all help to increase accuracy and simplify documentation.

Make an effort to maintain your recordkeeping in order to avoid losing out on deductions and other benefits. Thankfully, there are resources available to help ensure that this procedure is as easy and flawless as possible. For example, banks, online apps, and credit card downloads can all contribute to improved documentation accuracy and simplicity.