If you are like most small business owners, you are just gearing up for your annual taxes – sorting through receipts and bank accounts and trying to get a handle on last year’s finances so you can get through this year’s taxes before the deadline.
According to the Small Business Accounting Report, more than 70% of small business owners outsource their tax preparation, but that doesn’t mean they are off the hook. Even with an outside accountant handling your company’s taxes, you still need to make sure your business records are in order so an accountant can do his/her job properly. And record keeping can be a problem, with 33% of respondents listing “managing paperwork and receipts for taxes/annual audits” as one of the biggest challenges they face in the lead up to tax season. However, those aren’t the only challenges small business owners face as they prepare their taxes.
Here are five common tax mistakes small business owners make and the ways they can be avoided:
- They don’t understand all the potential tax authorities they may owe. You’ve started your business, things are going well, you’ve picked up clients across the nation, and you’ve even started hiring some full-time employees. Business is booming, and it’s great. But it also may impact where and to whom you owe taxes. As an individual you are used to your state and federal taxes, but as a business there are a host of new, potential taxing authorities. As CPA Janet Lee Krochman explained to Open Forum, “Besides the obvious IRS and related state agency, there are sales taxes, property taxes, payroll taxes, local taxes, excise taxes, self-employment taxes and other specialty taxes.” Taxes can become even more complicated if you pay employees who live in different states or towns. It is not uncommon for states and even county or district localities to have their own filings and deadlines. It may be tempting to try and save costs by doing your own taxes, but it pays to hire a qualified accountant.
- They mingle personal and business, especially when it comes to accounts and expenses. When you don’t have dedicated personal and business accounts, each year you have to review multiple accounts to determine where you spent personal money on business expenses or where you may have spent business funds on personal expenses. According to Inc.com, 45% of accountants say that “mixing business and personal expenses in deductions is the most common mistake business owners make.” This one mistake is one that can lead to an audit by the IRS. Luckily, there is an easy fix. Keep two separate accounts, one for your business and one for your personal funds. Make sure you run all business expenses through your business account. If you desperately need money for a personal expense, just write yourself a check, but, as much as possible, try to avoid this practice.
- They wait until the last minute to organize their financial information. When tax season comes, many small business owners find they need to sift through a cluttered bag of receipts, multiple bank accounts and credit card statements to make sense of their dollars and cents. It may seem like a hassle to constantly organize your finances throughout the year, but it saves time in the long run, and it ensures you can claim all the deductions you deserve or that you don’t try to claim any that don’t apply to you or your business. The process starts with monthly receipt collection and notating the expense on each receipt. The ideal method – a full tax diary or tax organizer. Instead of spending hours searching (with significant anxiety) at the end of the year, take 5-10 minutes at the close of each day to write a quick entry in the tax organizer. As Sandy Botkin explained to CBS News, “A tax organizer has all the questions that the IRS requires you to answer about travel, entertainment and other expenses. It will bulletproof your records and eliminate procrastination, and if you’re audited, it shifts the burden of proof to the IRS.”
- They don’t keep track of inventory or assets. Every company owns inventory and assets, from the computer you are reading this on to the maybe thousands of products you may have stored in a warehouse. And you need to keep track of both your assets and your inventory for tax season. You are required to pay taxes on the value of your assets, and you can reduce your liability if the value of those assets has decreased since last year. It’s crucial to run a comprehensive inventory prep at the close of each year, this is good for business forecasting and planning and is paramount for accurate taxes. Also, make sure you stay up-to-date on the rules and methods for calculating asset depreciation so you claim the right tax deductions.
- They don’t properly classify their workers. Sometimes, it’s hard to determine if a small business employee is full-time, part-time, or a contractor, especially if people are working remotely. Every time and with every employee it is critical to classify an employees worker status and designation right. Failure to do so can lead to fines and big trouble with the IRS. A simple way to figure out whether someone is an employee or a contractor is to assess how much control you exert over their work and how dependent they are on you for work. Do you set specific hours for them? Do they work with their own equipment (i.e. computer) or do they use your equipment? Do they work from home or in your office? If you are giving them the equipment or tools and the space they use to do their work and have tight control over their schedule, they are most likely an employee. If they control their time and equipment, it’s more probable they are a contactor. The safest ways to figure this out is to double check with your accountant or ask a payroll expert.
With the tax season crunch upon us, don’t spend too much time fretting over some of the common tax mistakes you may have made this year, instead focus on what you can do to avoid them next year by learning from the unfortunate mistakes of others – take our suggestions to protect you and your business.Business & Finance Articles on Business 2 Community