It’s that time of year again—tax season. Most business owners and startup founders consider taxes a hassle at best, but filing them correctly is critical. Not only do prompt and accurate tax filings avoid penalties and offer peace of mind against random audits, but they can be a significant tool for financial planning.
Organizing and leveraging the tax folding process can help you maintain accurate records, better forecast cash flow, and integrate potential deductions into your long-term financial plan.
But common pitfalls often prevent businesses from taking advantage of this.
In today’s article, we’ll cover the top 7 tax pitfalls businesses face and how they affect your ability to scale.
1. Poor Record-keeping
Small business owners and entrenches often wear many hats, so it’s easy to get behind in recordkeeping. Incorrect reporting can result in underestimating taxes owed and missed deductions. Furthermore, a surprise IRS audit can become extremely stressful if financial accounts aren’t organized.
It’s essential to maintain a record of all financial transactions. Using accounting software or hiring a bookkeeper can help keep you on track.
2. Not Taking the Right Deductions
Small businesses can leverage several deductions, including green tax credits. They can also leverage tax breaks related to healthcare, research and development, and utility costs. However, it’s easy to miss out on potential tax savings, as the IRS updates available credits from year to year.
CPAs and bookkeepers may be able to identify potential tax credits for your business. But planning ahead can also be advantageous. For example, if you know you want to purchase a company car, you can budget to buy a qualified electric vehicle and cash in on the related tax credit during tax season.
3. Not Sending Regular Payments
It’s often helpful for businesses to follow the IRS’ quarterly payment periods. Doing so enables you to be caught up on your taxes by the end of the fiscal year and can help you avoid potential penalties for filing late or underestimating tax owed.
The four payment periods are:
January 1 - March 31
April 1 - May 31
June 1 - August 31
September 1 - December 31
4. Mixing Finances
Another big no-no is using your personal bank account for business expenses and vice versa. This pitfall is more common with new small businesses and startups, as they may not have immediately set up a business bank account. However, this should not become a habit.
Mixing finances results in disorganization and confusion over-claiming expenses.
5. Not Working with a Planner
As your business grows, it's often helpful to leverage the expertise of a tax professional. CPAs and bookkeepers offer business owners peace of mind. These experts may track expenses and income and assist you in filing taxes without worrying about missing a deduction. Furthermore, they can answer your questions to help you better budget for the next year.
While hiring a professional does create an additional cost, it saves business owners time and offers peace of mind.
6. Not Planning Expenses
Another potential issue is not planning expenses ahead of time. Setting and sticking to a budget ahead of time not only helps you to better organize your business accounts, but also estimate taxes and deductions.
A good way to get started with planning your expenses and cash flow in-depth is with a financial coach. These professionals aren’t limited to tax advice—they often help you optimize your budget and offer recommendations based on your specific industry needs.
7. Misclassifying Workers
Growing businesses often use both employees and independent contractors. However, it’s important to classify workers correctly. Misclassifying an employee as an independent contractor can result in penalties and back taxes. This misstep can also result in hefty legal fees and potentially higher insurance costs.
Most states follow the IRS’ criteria for differentiating between the two worker types. However, your state may have specific requirements related to W-2 and W-9 employees.
Take Your Business to The Next Level
Tapping into tax savings isn’t the only way to boost your business resources.
One of the best ways for businesses and startups to grow is to leverage their network. The Wallet Max Hub offers small business owners and founders the chance to connect with each other, as well as investors and potential customers.
Join our hub today to start growing your community.