1. Failing to hire an experienced professional
Hiring a professional will minimize the potential for errors in areas like expense tracking, paying vendors on a timely basis, reconciling bank accounts, and running payroll.
Are you confident you’re handling employees’ tax withholdings properly? Are you keeping track of all your financial transactions, regardless of size? Just a few mistakes in these areas can cost you more than you’re saving by not hiring a professional.
2. Not tracking business costs accurately
If you’re not keeping accurate records, your accounting and bookkeeping becomes much less effective. When that happens, you leave your business vulnerable to losing money and being late on important bills. This sets you up for major headaches come tax season and more problems that can get in the way of a growing business.
3. Mixing personal finances with business accounts
Small business owners often blur the line between their personal and business finances. It’s understandable, especially when a business is just beginning to find its foothold.
More than one-quarter of small business owners don’t have a separate bank account for their business, according to a survey by Clutch. Using one account can make it tougher to sort out your personal and business transactions, which could cause significant issues when tax time comes around. With careless financial accounting, you may even miss an expense that you could list as a business deduction.
Blurred lines between business and personal accounts could also be a problem when you apply for a loan or line of credit, as lenders want a complete and accurate snapshot of your business’s finances when they consider your loan application.
4. Not properly planning for tax season
Do-it-yourself tax software may be suitable for preparing a simple tax return, so it can be an attractive solution for small businesses looking to save money on an accountant or other tax specialist.
If you’re tackling your business tax filing, you may stumble if you haven’t taken steps along the way to document your company’s finances properly. No one enjoys piecing together a year’s worth of receipts and documents in April because they were disorganized the other 11 months of the year.
In the Clutch survey, nearly one-third of small businesses said they believe they end up paying too much come tax time.
Enlisting a tax professional will help you spot potential savings and things your business could be doing differently well before the tax year is over.
5. Failing to classify employees properly
Small businesses rely on employees, freelancers, independent contractors, and gig economy workers to get the job done. How they classify these individuals could result in lawsuits and tax penalties if they do it wrong.
If a small business owner misclassifies an employee, it means federal and state governments miss out on payroll taxes, and the penalties for that could be substantial, according to the U.S. Department of Labor.
Business owners may be on the hook to cover payroll, Social Security, unemployment, and Medicare taxes for employees it misclassifies. The business can also get hit with penalties and face lawsuits if employees aren’t reimbursed and provided benefits under the Fair Labor Standards Act.
To avoid misclassifying employees, you must determine if they are employees or contractors based on the jobs they perform, how they are paid and their relationship with your company.
6. Going paperless without a backup
The last thing a small business owner wants to go through is a tax audit. But if you do have to, the more paperwork you have, the better off you’ll be.
In this digital age where everything lives in the cloud or on an app, it’s understandable that people don’t save their paperwork for a few weeks, let alone seven years, but the IRS will want it during an audit.
A good rule of thumb is to save the following documents for at least seven years:
- Business tax returns
- Payroll tax records
- Current employee information
- Business ownership records
- Records from operations
How we can help
Make sure you set your business up for success by speaking to a TaxAssist Advisor. We offer a free initial consultation and can discuss your personal situation and what services we provide, to help make running your business as smooth and efficient as possible.
*Our network of TaxAssist Advisors is made up of independently owned and operated franchised locations. While many are, not all locations are operated by CPA members and some of the services listed here may not be offered by practices which are not operated by a CPA. Inquire online here to book your free, no obligation consultation.
Date published Jun 24, 2022 | Last updated Aug 4, 2022This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
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