Your Guide to Financial Empowerment
Hello! Welcome to the first edition of The Tax Nook. Where we talk about all the different pains entrepreneurs go through when it comes to their tax returns and tax liabilities! The good, the bad, and even the downright ugly.
With that said, here are 5 common mistakes entrepreneurs make every year! 👊
1. Failing to keep accurate records
I know, you're probably thinking "I keep my receipts!". Nowadays, that isn't exactly the best way to go about it. Small business owners who fail to keep accurate financial records tend to miss out on important deductions or be unable to provide substantiation (or proof) to the IRS in the event of an audit.
So, how do you keep your records? I keep mine in Quickbooks Online. Quickbooks Online allows you to track mileage, snap photos of your receipts (Yes, you keep your receipts still!), and keep track of every expense whether it is $5,000.00 or $5.00.
2. Mixing personal and business finances
It is essential to keep personal and business finances separate. Mixing expenses can make it difficult to keep track of deductible expenses and can even trigger an audit. This is called "Piercing the Corporate Veil". If you need to use some money out of your business account, it is entirely okay to do so. The one thing to remember surrounding this: transfer the money you need to your personal account first, or withdraw it in cash at the bank. This takes the question of whether or not the expense is deductible out of the mix!
3. Failing to pay estimated tax payments
Small business owners are generally required to pay estimated tax payments. Failing to do so will incur penalties and interest charges from the IRS.
How do you know how much to pay? The question of the hour. Talk to your tax professional and see if they can run you a tax return projection for next year. This will give you a better idea of how much you should pay each quarter. This also reduces the amount you have to pay in one lump once April comes. If the projections are right, then you should owe less than $1,000.00 or receive a return of $1,000.00 or less. The goal is to get as close to $0 as possible.
4. Misclassifying workers and contractors
Small business owners need to understand the difference between employees and independent contractors. Misclassifying workers can lead to hefty fines and legal issues.
There are a few questions you can run through to differentiate how to classify workers you may hire.
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
If you answer yes to these questions, you have an employee on your hands. If you answer no, then you have a contractor.
5. Failing to take advantage of tax deductions
There are a variety of tax deductions available to small business owners. Failing to take advantage of them can result in paying more taxes than necessary. Some commonly overlooked deductions include startup costs, mileage expenses, home office expenses, and even retirement credits.
So let's talk about startup costs. You can deduct up to $5,000.00 in your first year as an entrepreneur. If you paid more than that in start-up expenses, then we amortize it. In other words, you get to deduct a little bit every year for 15 more years.
Retirement credits are severely underutilized as well. Most business owners that I work with think they can't save for retirement. The good news is, you can! The best retirement plan that I have found for small business owners is a SEP IRA. Otherwise known as a Simplified Employee Pension Plan. As a sole proprietor, you can contribute up to 20% of your bottom line. As an S Corp, you can contribute up to 25% of your salary! More retirement savings, and an additional deduction to your company.
Have you made these mistakes?
Let's be real, I have too. We are human, and it's easy to push your tax situation to the back burner until the snow melts.
The best thing you can do is get ahead of the curve and talk to a tax professional now to get your ducks in a row. Doing so will reduce your tax liability the legal way and keep the stress out of your business.
Book a free consultation with me here!
Register for Tax Tricks: How to Leverage Your Expenses here for more information on tax deductions!
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