BIG Small Business Tax Mistakes & How to Avoid Them
Featured Guest Writer: Stephanie Thacker with Steadfast Bookkeeping Co.
Find more from Steadfast Bookkeeping Co. HERE
As a small business owner in the U.S.- you have a liability to file income taxes. Yep, I said it - income taxes! It’s a thing you can’t avoid and I understand it’s like one of those “necessary evils” of running a business. I’m here to give you some tips on how to make this your best tax season yet and talk about some mistakes you definitely want to avoid!
As I said, you can’t avoid taxes. SERIOUSLY!! This is my #1 tip - Don’t avoid taxes. I know they can be scary... I know it sucks to take a portion of your hard-earned money and give it to the government. I KNOW! But, it’s the law and you CAN'T hide! Please do not think that if you just “lay low” or act like the word tax doesn’t exist in your vocabulary that it will all be okay because really, it won't. I’m not trying to scare you, I’m just being real. At some point, the IRS will figure out that you haven’t been filing and/or paying taxes, and then you’re going to be hit with all kinds of penalties and fees, and trust me those are even worse to pay than the taxes themselves.
Ok, we’ve made that clear, right? - don’t avoid them. What are some things you can avoid though? Well, how about I give you some common mistakes I see so you can take note and avoid these things. These mistakes below are the things you want to avoid...not taxes!
Mistake #1
Lack of Bookkeeping
Bookkeeping is literally just the process of recording income and expenses in your business. This can be done in software like QuickBooks Online, or in a spreadsheet. It can be done by you, a team member, or an outsourced firm like mine. The biggest emphasis here is that you want to keep track of the money coming in and the money going out! I’ve seen it so many times where business owners didn’t track anything and then at tax time, they are scrambling to pull some numbers together. Ultimately, I think it does an injustice to the business owner because when you are rushing and trying to use statements to figure out what you made and what you spent, things get missed and you likely end up paying more in taxes because of it. If bookkeeping scares, you - don’t let it. I have some videos of bookkeeping best practices that might be helpful on my YouTube channel and I even have a “3 biggest bookkeeping mistakes” video that might be helpful so be sure to check those out!
Mistake #2
Not Consulting a Tax Professional
Okay, I get it. I’m the owner of a tax and bookkeeping firm and my first two tips are all about doing your bookkeeping and consulting a tax professional but hear me out. I think there is a time for DIY bookkeeping, I truly do. However, I’m a firm believer that every small business owner should have a tax professional handle their taxes. Here’s why:
Tax code is serious. It’s long. It’s just A. LOT. There is no way as a business owner that you are going to have time to study tax code and determine what deductions and credits, etc are best for your business. Leave that to a professional that literally dedicates a huge amount of time staying up to date on tax code and tax laws in general.
The fee you pay a tax professional is literally a tax deduction! Yep, it’s 100% deductible so why not let a professional handle it and then be able to deduct it?
Tax software doesn’t always catch everything. They don’t know you personally, they don’t speak to you, they don’t ask questions that a tax professional would. This is one of the things where working one-on-one with a human really pays off.
Seriously, avoid the headache of doing it on your own, avoid the mistakes you might make, and pay for it later by filing it yourself and consult a tax professional! And, side note - we are still taking clients for the 2020 tax season so if this one is hitting home for you, click here to contact me about filing your taxes!
Mistake #3
No Record of Receipts
You guys, if you were ever audited - this could be bad! All of those lovely deductions you were able to claim on your tax return need to have some proof behind them! If the IRS audited you for your travel expenses or your meals expenses or even your advertising expenses - you are going to need to submit PROOF of those expenses. If you don’t, you’ll end up penalized and having to pay taxes on those even if they were valid, all because you didn’t have the proof! One thing you can do to avoid being stuck in an audit with no proof is to set up an organized system of tracking receipts. I actually posted a video about this a few weeks ago, so check it out. It’s a really easy and simple way to track everything for free on Google Drive!
Mistake #4
Not Saving Money for Taxes
Now please, hear me out - yes, there are deductions and credits you can take but the reality is, most of the time they are not going to completely save you from having a tax bill. One thing you can do to avoid a gut-wrenching, absolutely shocking number show up on your tax return is to SAVE money for taxes. Yep - right off the top, you should be putting some money aside for taxes. Now, I do think you should talk to a tax professional about what percentage is right for you, but in general, a good rule of thumb is to save at least 25% of your profit for taxes. And really, you should be making estimated tax payments each quarter. By doing this, you’ll reduce that shock and horror that you may have felt in the past when looking at the “amount due with return” box.
I hope that sharing those mistakes and how you can avoid them was helpful and not scary. I truly want to help you with this and simplify all of this in your business so if you’re ready to have someone handle taxes for you, make sure to contact me here!
