Although tax season makes a lot of people anxious, it can feel especially overwhelming to new business owners filing their first tax return. Perhaps you’re afraid of making a mistake that would trigger an audit or of leaving money on the table because you didn’t understand all potential tax deductions. Below are three common mistakes made by small businesses along with what you should do instead.
1. Keep Business and Personal Financials Separate from Day One
Business owners who think it’s no big deal to maintain one checking account, credit card, or other financial account for business and personal finances quickly find out differently at tax time. It can be an extremely frustrating and time-consuming experience to separate the financial information later to determine what to file with your personal tax return and what to file with your business tax return.
The Internal Revenue Service (IRS) won’t allow you to claim a deduction without documentation, which means you may lose some deductions because you can’t figure out how to separate the paperwork. Setting up separate financial accounts from your first day in business helps to avoid confusion and allows you to track both personal and business funds more efficiently.
2. Hire Independent Contractors Whenever Possible
An independent contractor is a self-employed individual who may work with many clients at once or focus on a single client until completion of the project. When you hire an employee, you must deduct federal, state, social security, and Medicare taxes as well as contribute towards unemployment insurance, workers’ compensation, or any payroll taxes. Independent contractors submit their own tax payments to the IRS and state governments based on what they earn per quarter.
While this option can save you a lot of money, the IRS enforces strict criteria for determining who qualifies as an employee and who qualifies as an independent contractor. You face the back payment of taxes plus significant fines if you misclassify a worker, even if wasn’t intentional. Information available at this link can help you determine the difference.
3. Keep Excellent Records to Take Advantage of Tax Deductions
A good rule of thumb here is to save a payment receipt for any expense that you plan to deduct on your business tax return. It can be a credit card receipt, ACH transaction, cancelled check, or another form of printed or electronic proof of incurring the expense. Whatever you submit as proof, remember that it must have the name of who you paid, the amount, and a date. All dates must be within the same calendar year. When you prepare taxes for 2019, for example, all payment proof will be for that year and not 2020 when you submit the return.
Learn More About Our Tax Planning Services
Tax planning is one of the many services we offer to business clients at Capital Business Strategies. We invite you to schedule an appointment to learn more about how we can help your business minimize its tax obligation every year going forward.