Today, we’ll be going over the biggest mistakes that we see small business owners make.
Mistakes that cost them time and you better believe, MONEY.
Now, we completely understand that you’re reading this and maybe you’re a new business owner.
You have good intentions and want to do the right thing but not exactly sure of what to do.
Well, this post will highlight some of the things that you should NOT do as a new business owner or business owner, in general.
7 Tax Mistakes Business Owners Make
Tax Mistake #1: Not having a separate bank account
The first tax mistake that we see new business owners make is not having a separate bank account for just their business.
It is so important to do this so you can clearly keep track of all of your business income and expenses.
After all, you want to write off as many business tax deductions as possible. And in order to do that, you need to have organized records.
Too often, we see new business owners operating from their personal accounts which creates a big mess at tax time.
Some business structures, like LLC and C Corp, are actually required to have a separate account for their business.
Or else, their business is at risk of being shut down.
More importantly, for you as the business owner, it would be nearly impossible to know where your business stands financially without segmenting your business and personal finances.
You can open a business account at any major banking institution.
You just need to make sure that you have an Employer Identification Number for your business set up first.
Tax Mistake #2: Not paying quarterly estimated tax
If you don’t make quarterly tax payments, the IRS is going to assess BIG penalties and interest on the tax you owe.
This can easily be thousands of dollars.
Let us break down what estimated quarterly tax payments are.
When you work for someone else as an employee, your taxes are automatically withheld and paid by your employer to the IRS and state agencies throughout the year.
For most employees, this is why little to no taxes are due when they file their tax returns.
But for business owners, it’s different.
Since you are the employer and the employee, you need to make sure you pay your taxes quarterly throughout the year.
The IRS basically prefers to get their money throughout the year than at the end of the year when you file your taxes.
But how much should you pay?
Well, it depends.
There’s an IRS Form 1040-ES that helps calculates what you should pay in quarterly taxes.
A simpler method is paying 110% of the prior year’s tax quarterly.
So for example, if your tax expense was $100 last year, 110% of that is $110.
So you can break up that $110 by 4 quarters and pay $27.50 per quarter as your quarterly estimated tax payment.
Failure to do so will result in more money owed.
Tax Mistake #3: Not reporting all of your income
When you receive any kind of tax document, like a 1099 or even a w-2, that same form has already been filed with the IRS.
This means the IRS already knows how much income you earned during the year. A lot of times, they know it before you even know.
If you file your return without including this income, you will almost certainly receive an IRS letter outlining the discrepancy.
As well as any additional tax and penalties that are due.
No one wants that.
To avoid this, report all of the 1099s you receive from your customers or other sources.
If you process credit card payments, you should receive a 1099-K from the merchant which shows all of the payments they processed and remitted to you.
Tax Mistake #4: Reporting ‘clean figures’
The next tax mistake is reporting ‘clean figures’.
So clean figures meaning you’re deducting exactly $300 in supplies, $700 in travel expenses, or exactly $500 in vehicle expenses.
Do you see the trend?
All of these deductions end with zeros. Though it is possible for this to happen, it is just EXTREMELY unlikely.
This mistake kind of goes with mistake number one – not separating personal and business expenses.
Quite often, we see business owners with clean figure expenses because they are estimating the expense since they didn’t keep track of the expenses during the year.
When the IRS processes a return, it is ran through a machine or software and it picks up on things like this.
So it will definitely raise a red flag and could easily result in an audit.
And we don’t want that.
To avoid this tax mistake, make sure to have some kind of accounting system in place that keeps track of your actual business expenses.
Tax Mistake #5: Filing late
March 15th. April 15th.
It is the same every year.
It’s never convenient.
It’s never fun.
But. It. Has. To. Happen.
We see it time and time again. Business owners filing their business and personal tax returns late.
If you need more time to file, you can always file an extension which will give an additional 6 months after the original due date.
So for most of you, either September 15th or October 15th.
Failing to file on time, either the tax return or extension, will result in… you guessed it. PENALTIES.
Yes, unnecessary tax penalties. So do yourself a favor and set an annual reminder to file both your business and personal tax returns.
Also, we want to mention, that filing an extension does NOT extend the payment of your taxes.
So as mentioned before, pay at least 110% of the prior year’s tax and that should save you from failure to pay penalties.
Tax Mistake #6: Having inactive or dead LLC
Perhaps you started an LLC with the big goals of having the best online store or marketing agency or real estate firm but just never got around to making it actually happen.
Don’t feel bad. This happens a lot.
But what happened to your LLC?
Did you pay your annual state fees?
Did you file tax returns during those years it was inactive?
The thing is, once you open an LLC, you now have an obligation to keep it in good standing. And that is regardless if you made any money or not.
Those fees accumulate year over year. So if it’s been 3 years, you’ll have to pay the fees associated with all 3 years to be in good standing and legal to operate.
Tax Mistake #7: Failing to be taxed as an S-Corporation
We actually have a post covering the ins and outs of S-Corporation taxes so be sure to check it out when you get a chance.
But, electing to be taxed as an S-Corporation can literally save you thousands of dollars in taxes.
Most business owners pay taxes based on the default treatment of their entity.
So for most LLCs, there’s a self-employment tax (of about 15.3%) that is assessed based on the entire income of your business.
Compared to an S-Corporation, where self-employment tax is only paid on the salary you paid yourself.
Any amount above your salary is not subject to self-employment taxes.
Electing to be taxed as an S corporation only makes sense after you reach a certain level of income from your business.
But as you start earning $60k, $70k, $80k, or more, we highly recommend looking into S-Corporation status to reduce your self-employment tax liability.
Avoid These Tax Mistakes At All Costs!
So there you go – the biggest tax mistakes that many business owners make.
LYFE Accounting has the best solutions for every financial needs. Schedule a meeting with us today!