As the old saying goes, nothing is certain in life but death and taxes. Taxes are an unfortunate reality that every business owner must deal with. As frustrating as they can, they are even more stressful if you don’t monitor them closely.
Here are some of the most common tax mistakes new business owners make.
Neglecting the Self-Employment Tax
Many business owners don’t know about the self-employment tax. This tax covers future Social Security and Medicare benefits. It is currently 15.3% of your gross profit, but is subject to increase.
You can’t overlook this tax when you file your return. You need to set aside money for it every month, because it can be expensive if you overlook it and have to pay it on tax day.
Failing to Set Money Aside Every Month
When you have a day job, your employer automatically deducts taxes from every paycheck. You don’t have to worry about getting it to the IRS yourself.
You can’t be as complacent about taxes when you work for yourself. Paying taxes is 100% your responsibility. If you fail to set money aside every month, you will keep falling behind on your taxes.
Don’t plan on using future proceeds from your business to pay taxes near the filing deadline. Your business may slow down, which will make it difficult to raise the money you need by the time your taxes are due.
Don’t Take Tax Loans Without Knowing Your Refund First
There are a number of companies that will offer a tax anticipation loan to eligible taxpayers. Unfortunately, as a small business owner, you may not know how much money you will earn by the end of the year. You should only try to take these loans if the fiscal year is already over and you know that you qualify for a refund (and what the size of the refund is).
Being Too Liberal With Your Deductions
The tax code allows you to take a lot of deductions, particularly if you are a small business owner. You can claim the following and personal and business deductions:
- The home office deduction
- Contributions to approved charities
- Internet and other utilities
- Travel expenditures
- Mileage for vehicles used for business use
While you should generally take advantage of legal deductions available to you, you can face steep penalties if you claim items that aren’t actually permissible. For example, if you take a business trip, you can only deduct hotel costs for the days that you are actually on business. If you are sightseeing for part of the trip, then you can’t claim those costs.
You also should be cautious about taking deductions that are highly likely to trigger an audit. Here are some deductions that you need to be careful with:
- Many people abused the home office deduction, so your chances of being audited increase significantly if you take it. You should only take advantage of if you know that you are claiming it correctly and the rest of your tax record is squeaky clean.
- You may be eligible for the Earned Income Tax Credit if you have limited income. However, a lot of people have abused this credit, so the IRS is highly likely to investigate it.
Make sure you know what deductions you can claim.