1. Inaccurate record keeping
Keeping detailed and accurate records provides a strong foundation for any business. When running a business, accounting for every dollar in and every dollar out helps keep your business focused on the money.
Good bookkeeping is very helpful when it comes to staying out of tax trouble as well. If you keep accurate and detailed records, you and your accountant or tax preparer are less likely to make mistakes. Keeping your Profit and Loss Form and Business Financial Statement up to date is important. Your Invoices and Receipts may also be critical records to make sure you organize and track, as these can help you prepare your Small Business Tax Worksheet when it’s time to hire your tax pro.
2. Missed deductions and credits
Remember the old saying: A dollar saved is a dollar earned. Learning about your tax breaks, deductions, and credits can help you take advantage of them so you can cut costs and save money all year long.
Savvy business owners know that the right deductions, credits, and tax breaks not only help lower your tax bill, they can increase a company’s bottom line.
3. Late or incorrect filing
When it comes to taxes, deadlines are important, and so is getting it right. Often, there are several tax deadlines or tax forms that business owners must stay on top of. Missing deadlines or filing the wrong form can lead to penalties and interest, which is lost money. Planning ahead and working with a tax pro allows you to avoid these penalties and interest which can cut into your bottom line.
4. Underestimating estimated taxes
Paying the right amount of tax at the end of the year can be confusing. For the self-employed, independent contractors, and small business owners that are required to pay estimated taxes four times per year, it’s even more confusing.
Underestimating quarterly estimated taxes leads to a tax bill at tax time, and underestimating by too much can lead to tax penalties and interest. Setting reminders on your calendar is a smart way to make sure you do not miss the quarterly deadlines. Talking with a tax professional is a smart way to make sure you know how much to pay each quarter.
5. Commingling personal and business expenses
Simply put, separate accounts and credit cards is a must. Mixing business and personal finances is a recipe for confusion and legal trouble.
For business owners and potential investors, it makes it difficult to understand how the business is performing when personal and business accounts are mixed. When it comes to taxes, identifying tax deductions and breaks, and tracking personal and business expenses requires a time-intensive accounting to separate personal and business costs.
6. Ignoring sales tax obligations
Businesses that sell products or services may be required to collect sales tax from customers and send that tax back to their state, county, city, or all three. Forgetting to do so, or collecting the wrong amount can be a costly mistake.
In addition to paying back the ignored sales taxes, there are penalties and legal costs associated with failing to collect and pay it. If your business sells products or services and does not already collect sales tax, you may want to ask a lawyer about whether you are obligated to do so.
7. Misclassification of workers
Employment taxes can be costly, but misclassifying workers can be even more costly. In addition to paying back taxes, there are penalties and legal costs. Hiring your workers as independent contractors can be a big risk, especially when your worker will:
Have an ongoing, formal relationship with your business.
Work the hours you set.
Follow your specific directions or instructions to complete their work.
While classifying workers may seem confusing at first, setting up employees is less difficult than business owners often expect. This is important to get right from the get-go, as getting it wrong can lead to a big tax headache and potentially costly legal trouble.
8. Doing it all yourself
Just because you can do anything, doesn’t mean you should. While being an entrepreneur requires hustle, wearing many hats, and learning as you go, there are some risks that are just not worth taking. Taxes are serious business, and getting it wrong can have serious consequences, including facing a tax audit.
Think of your business as a team sport. When it comes to taxes, lean on a tax professional so you can stay focused on your role on the team.
If you have tax questions, reach out to a Rocket Lawyer network attorney for affordable legal advice. Want to leave figuring out complicated tax credits and deductions to the pros? Save HALF OFF Rocket Tax™ professional tax filing fees with a Rocket Legal+ membership and get year-round savings and legal help with the membership that pays for itself.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.