Small businesses make up the majority of employers in the nation and have access to government programs and incentives to keep employing workers in various industries. Many of these incentives will involve tax breaks and credits. Still, only some small businesses are taking advantage of these incentives, and some are making other major tax mistakes that can cost entrepreneurs significantly. In addition to seeking professional tax leading up to filing dates, small business owners can work to avoid these seven common mistakes.
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Not Researching Credits and Deductions
One of the biggest mistakes small business owners make with their taxes is researching applicable credits and deductions when it is time to file. If you find out about the ERTC tax credit right before hitting the “submit” button, for example, you may have to do without it because of missing paperwork or other qualifications. Knowing about the various credits, deductions and qualifications from the beginning of the year can help you tick all the boxes by the time you need to file.
Not Passing Along Sales Tax
Your customers must pay sales and use tax to the state. The business pays this tax and usually passes the costs to the customer. This means you must take the taxes paid to your business by the client and pass them along to the state as soon as possible to reduce your payment liability at the end of the quarter.
Poor Record Keeping
Poor record-keeping is one of the most common mistakes for small businesses and entrepreneurs alike, especially when paying, filing and documenting taxes. You must keep proper records to prove you are eligible for deductions and credits and may be responsible for paying more taxes than you owe if audited.
How you classify your business on your legal documentation will significantly impact your taxes more than most small business owners think. For instance, corporations will file different taxes than LLCs, sole proprietorships or partnerships. Classifying your business as an LLC and following the tax codes for corporations can mean that you are not paying state taxes when you should be or paying federal taxes, which an LLC would qualify for a credit on.
Misunderstanding Payroll Taxes
Payroll taxes are a massive part of what you need to pay and can represent many costly mistakes. For instance, classifying an employee as an independent contractor will make you guilty of tax fraud because you will not pay the proper taxes for a genuine employment relationship. Remember, as a business owner and an employee, you are responsible for payroll and income taxes and will need to withhold and each pay accordingly.
Not Researching Tax Changes
The tax codes change each year, and there are more significant changes in some years. By keeping up with the changes, you will ensure proper documentation, prepayment and filing. This can help you comply with tax laws and help you find more deductions and credits you qualify for. Your tax professional can help you keep up with these changes, and it is a good idea to ask him or her for advice on which documentation to keep each year.
Not Separating Business and Personal Finances
While this mistake can go along with several others, such as poor record keeping and payroll mistakes, it is significant enough to merit a separate entry on the list. You will have individual entries for your company’s contribution to your payroll taxes and income tax withholdings, making it easier for your tax professional and potential auditors to see the distinction. Keeping your business and personal finances as independent as possible will make filing your business and personal taxes much more manageable.
Making mistakes on your taxes can end up costing you a lot more. You can either overpay by missing deductions and credits, or you can inadvertently commit tax fraud by underpaying or misrepresenting your liability. By keeping excellent records and staying up-to-date on the latest changes to the tax codes, you can make it easier and more effective to file your business and personal taxes.