Running a small business is difficult enough without making costly and preventable tax mistakes. The following are the top 4 most common tax mistakes small business owners often make. By avoiding these simple mistakes, you can overcome challenges that spell doom for others in similar situations.
1. Commingling business and personal expenses
Tax authorities maintain strict rules regarding the mixing of business and personal expenses. Avoid such problems by taking some basic steps:
- Having a separate bank account for your business
- Getting a credit card to use strictly for business purposes
If you do use personal items for business purposes, you must diligently keep records regarding their use. If you try to make a deduction without the documents to back up your claim, you could encounter problems.
2. Failing to make estimated quarterly payments
Paying taxes hurts, especially for a small or mid-sized business trying to stay out of the red. But failing to pay estimated quarterly taxes will only result in more expenses in the form of fines and interest. Establishing a special account to keep money for tax payments can help ensure you have the funds each quarter.
3. Staffing errors
Hiring independent contractors can reduce your tax burden, but you must make sure they are properly classified. There are different ways a worker can be improperly classified as an independent contractor. Requiring the individual to work onsite during specific hours with strict rules may establish an employer-employee relationship with associated taxes.
4. Failing to plan
It does not make business sense to pay more taxes than you need to, but this is essentially what a business owner is doing by failing to develop a tax plan. Numerous decisions can affect your overall tax burden, from the timing of purchases and sales to the type of entity you select for your business. By getting each of these decisions right, you can enjoy significant tax savings.
Get help when needed
By having these mistakes in mind, you can better identify red flags and avoid tax problems. If you do encounter a problem with the IRS or California tax authorities, experienced guidance can help you mitigate the damage the issue inflicts upon your business.