Are You Making One of These 5 Tax Mistakes?
When you start a business for the first time, there’s a lot to figure out — much of it by trial and error. One of the most common mistakes business owners make is not adequately preparing for tax time, and correcting these missteps can be a huge hassle. Not only that, but they can be costly as well. As a career CPA, and someone who has worked with hundreds of small and midsize organizations, here are five tax mistakes I have seen repeatedly with clients. Avoid these errors, and you’ll be in good standing with the IRS and your finances will be in good shape.
1. Not saving enough for taxes
While launching and running your own company can be exhilarating, one of the downsides is that you have to proactively pay taxes yourself. Employers automatically withhold taxes from your paycheck, but when you’re self-employed it’s your responsibility to withhold taxes. Not saving enough for estimated payments can trigger a big tax bill.
Pro tip: A good benchmark to save is 30 percent of your income for taxes.
2. Not making estimated payments
Another mistake that gets business owners in trouble is not making estimated payments throughout the year. If you owe more than $1,000 in taxes, you should be making estimated payments each quarter. Unfortunately, some business owners don’t do this and could face an underpayment penalty on top of a substantial tax bill. As an owner, you have the Self-Employment Tax which is 15.3%. On top of that, you have state and federal taxes.
Pro tip: What you owe in estimated payments will depend on what you earn in that quarter, so make sure you have a system for tracking quarterly revenue so you don’t under pay (or possibly worse, over pay).
3. Not filing on time
To stay in good standing with the IRS, it’s important business owners submit their tax returns on time and make appropriate payments. If you end up missing the deadline, you’ll be hit with a 5% penalty each month by the IRS. That’s why it’s crucial to request an extension if you know you won’t be able to submit it on time. However, just because you have an extension doesn’t mean you get an extension on what you owe. You’re required to make a payment by the tax filing deadline or you may face a late penalty and 6% interest.
Pro tip: If you’re unable to pay, you can look into your payment plan options with the IRS.
4. Not utilizing deductions
Being a business owner is costly, but here’s the good news: you can take advantage of allowable IRS business deductions. When you deduct business expenses, you lower your taxable income which may reduce the overall amount you owe. Not utilizing deductions the right way or not understanding how deductions work is a big mistake. To clarify, deductions don’t lower the amount you owe dollar-for-dollar. In other words, if you spend $100 on business equipment you don’t save $100 in taxes; rather, it lowers your taxable income by $100.
Pro tip: Here’s a great checklist to get you started.
5. Not paying all tax types
The last common mistake is not understanding what types of tax that you actually have to pay. Businesses make the mistake of assuming that tax only means the money you owe to the IRS and unfortunately that is not true. There could be up to 6 different tax liabilities depending on the type of business you operate and where. This includes sales tax, state income tax, annual reports, business personal property tax, and business license tax.
Pro Tip: A good tax calendar that helps you manage what tax you have to pay and when, like ComplYant (cough cough).
These five common tax mistakes happen to even the smartest business owners, but the good news is they are fixable. Getting the right tax support can help you manage your expenses and tax payments. And of course, using ComplYant, you can stay organized and on top of your tax obligations without any of the hassle.