Entrepreneurs are passionate about their business. They are excited by their industry and they are motivated by rising figures. However, one thing that most entrepreneurs are not so focused on is tax. It is all very well being an expert in your chosen business field, but when you decide to pour that expertise into your own business you also need to start becoming an expert on taxes too.
We know it is far from the sexiest part of being an entrepreneur, however understanding or ignoring the importance of business taxes can be the make or break of any company. Therefore today we are sharing the most common tax mistakes that businesses make and our top tips on how to avoid them.
Not Creating a Tax Diary
A lot of small business owners feel that if they are keeping their receipts – they don’t need a tax diary. This is a very common error that can lead to problems later down the road. All companies should be vigilant about keeping a tax diary, which although may cost you a little per month, will more than pay for itself when it comes to protecting yourself against any number of possible discrepancies that can come up. Just knowing that all your expenses are organized and documented will mean that your business is protected and safe from any tax issues that may arise.
Being a One-Person-Band
When anyone starts a business it is completely normal to want to do as much as possible yourself in order to reduce your overhead. Diving straight into a new business and hiring a full team of employees is certainly not usually the best way to kick start a new business idea. However there are some areas where it is certainly advisable to call in the pros to make sure that you are doing things the right way.
It is much cheaper to hire a business tax specialist, to sort through your taxes at the outset of your business than it is to have to contact an attorney if you are facing business law or tax dispute. Therefore ensuring that you are setting up your business, from the ground up, correctly with the help of an expert will give you the confidence to know that you are moving forward in the right direction.
Celebrating Tax Returns
Again this is something that we have all been guilty of. Receiving that lovely, juicy tax return and celebrating ‘that very welcome refund’. However this is not the right reaction to this situation. The fact that you are receiving a refund means that you have been overpaying in some area, which essentially equates to you giving the government tax free money, and probably for an extended period of time. Therefore instead of celebrating a large tax rebate you should be looking into how you can adjust your tax brackets in order to receive much smaller returns in the future.
Again only wanting to hire independent contractors is another appealing option to entrepreneurs just starting out in business. This is understandable as employees are expensive when companies are in that critical stage of initial growth. However as businesses develop it is advisable to reconsider this approach as your business develops.
Independent contractors are entitled to decide their own hours and their own timetable you may face problems. If the government decides that you are incorrectly categorizing an employee as an independent contractor then you may be charged a penalty for failing to comply with the correct employee taxes. So this is something that is worth looking into as your need for staff grows over time.
“I Have Complete Control of My Own Salary”
This is another common misunderstanding of how it works to be a business owner. Perhaps you are paying yourself a certain amount one year and then the following year you decide to double it due to the amount that your business has grown. The problem here is that without actually legally declaring a reason for this increase, you could be setting yourself up for complications.
The IRS can easily categorize large salary rises as an ‘unreasonable compensation’ and they can can actually intercept part of that income. The icing on the cake for this situation is that you may also end up paying tax on that charge if it is categorized as a dividend, which of course would be extremely painful. So make sure that you are careful about how you are structuring your own salary.
So there you go, these are some of the most common mistakes that businesses make when it comes to their taxes. Hopefully the above will help you to avoid these common pitfalls and keep on top of this area of your business.