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Nobody genuinely enjoys doing taxes, whether it’s as an individual or on behalf of a business. But small business owners, especially, dread tax season. There are some good reasons for this — for starters, it’s not a fun process — but for the most part, small business owners make business taxes much more complicated than they have to be.
Are you making some of these common mistakes with business taxes?
The basics of business taxes
This guide isn’t meant to educate you on business taxes from start to finish, but for the purposes of our discussion, it’s important to give you some tax tips.
Businesses are responsible for paying and withholding taxes. Sometimes, you’ll be responsible for paying taxes on the money you make. You’ll also be responsible for withholding and paying taxes on behalf of your employees.
There are five general types of business taxes you should be aware of:
Nearly all businesses must file an annual income tax return (partnerships must file an information return). There are different standards and procedures for this, depending on how your business is structured.
Your business may be responsible for paying taxes throughout the year in the form of “estimated tax” payments. Each quarter, you’ll make a contribution to the year-end taxes you project you’ll owe, including the income tax and the self-employment tax (if applicable).
Self-employment taxes apply to self-employed people (i.e., entrepreneurs) to cover Medicare and Social Security. There are some special rules and exceptions here, but most self-employed people will owe this tax.
Employers have specific employment-related tax obligations. For example, you’ll be responsible for withholding income taxes and withholding and contributing payments for Social Security and Medicare taxes.
Some businesses will have to pay special taxes on products they sell or manufacture — alcohol and gasoline are two examples.
At the end of the year, you’ll file a tax return for your business and provide documentation to the government to make sure you’ve paid taxes properly and provide any additional payments that are owed.
Note that in addition to filing taxes on a federal level, you’ll also have to pay taxes on state and local levels — and if you do business in multiple areas, you may have to file multiple tax returns.
The 3 most difficult elements of tax season
What makes tax season difficult for business owners? These are the top three challenges they face:
1. Record keeping and reporting
Most business owners start to face challenges because of poor recordkeeping and reporting. The meatiest part of “doing your taxes” is simply filling out forms. You’ll note the expenses you’ve paid, the money you’ve made, and dozens of other details and calculations. But if you’ve kept sloppy records throughout the year or if you don’t know the answers to these questions, you’re going to have a hard time filling out the forms accurately.
2. Meeting deadlines
Tax deadlines can feel tight, especially if you’re also juggling all your business operations while navigating the world of business taxes. If you’re caught off guard, or if you have trouble getting the paperwork together, you might have to scramble to meet a deadline — or face the consequences of missing one.
3. Using the correct forms
The IRS has hundreds of forms, they’re not labeled intuitively, and the instructions are often written in a clunky and disorganized fashion. It’s a pain to figure out which forms you need and how to use them.
9 mistakes small business owners make when filing business taxes
Many small business owners make some combination of the following mistakes when filing business taxes:
1. Missing deadlines
The most common mistake is the simplest to understand and the easiest to avoid: missing deadlines. Some combination of procrastination, inattention, disorganization and/or apathy ultimately leads to business owners missing important deadlines.
2. Keeping inaccurate or inconsistent payroll records
If you keep sloppy records, or if you don’t know where to find certain information, you’re going to have a hard time filling out and submitting the requisite forms.
3. Selecting the wrong business entity
Is your business a sole proprietorship? Or is it an LLC? You should know the answer to this question and know the differences between these business entities.
Every year, there are at least some business owners who file a return based on the wrong structure.
Taxes do tend to be more complicated for corporations and LLCs than they are for sole proprietorships and partnerships, but don’t let that intimidate you.
4. Confusing business and personal expenses
You have a client who’s also a good friend. You take him out to dinner for chit chat and laughs, and you happen to talk about business for a few minutes during this interaction. Does that technically count as a business expense since he’s a client of yours?
This is ambiguous territory. But the majority of your expenses will be very clearly business related or not business related. Delineate these categories and you’ll have a much easier time accurately reporting your expenses.
5. Deducting startup expenses incorrectly
Your business’s startup costs are (mostly) deductible, but the rules are somewhat difficult to understand.
According to Intuit QuickBooks, “The IRS allows you to deduct $5,000 in business startup costs and $5,000 in organizational costs, but only if your total startup costs are $50,000 or less. If your startup costs in either area exceed $50,000, the amount of your allowable deduction will be reduced by the overage. And if your startup costs are more than $55,000, the deduction is eliminated.”
Additionally, you can deduct startup expenses over several years. It’s easy to get things wrong here.
6. Categorizing staff members incorrectly
Modern businesses often work with a mix of full-time employees, part-time employees and independent contractors, all of whom have different tax implications. Categorizing your staff members incorrectly or accounting for them inappropriately could result in complexity (and possibly penalties) later on.
7. Glossing over small expenses
There are tons of little expenses accrued by your business, from petty cash expenditures to magazine subscriptions. If you don’t account for these when tallying up your expenses and deductions, you could end up paying more in business taxes than required.
8. Ignoring deduction limits
Not all deductions are treated equally. For example, talk to your tax professional about the percentage of meal and entertainment costs for your business that can be deducted.
If you try to deduct too much, you’ll run into major issues.
9. Neglecting some tax expenses
Businesses have many different types of taxes to consider, such as property taxes, payroll taxes, local taxes, excise taxes and self-employment taxes.
Yes, it’s a lot to keep track of, but each tax is important.
5 ways you’re overcomplicating things
As we’ve seen, there are some elements of business taxes that are truly complex. But many business owners end up exaggerating these complexities and overestimating how difficult doing business taxes truly is.
Why are you making business taxes overly complicated?
Chances are, you’re getting tripped up by one or more of the following tendencies:
1. You assume this is unfamiliar territory
Are you one of those people who “just isn’t good with numbers”? Do you believe yourself to be bad with money? If so, you may instantly underestimate your ability to handle taxes.
You don’t have to be a math genius or a personal finance guru to handle business taxes, so don’t sell yourself short.
2. You’re learning from the wrong sources
The IRS isn’t known for its approachability or clarity. In fact, many online sources are notoriously bad at communicating how taxes work. If you read an article that doesn’t make sense, don’t blame yourself and don’t blame the complexity of taxes. Just move on to an article that phrases things in different, easier-to-understand terms (or hire an expert).
3. You’re lost in the “big picture”
Businesses have many tax obligations and a cluster of responsibilities come tax season. If you try to contemplate and plan for all of them at once, you’re going to feel overwhelmed. Instead, try to focus on one step at a time and one form at a time. No individual step in the business tax world is unconquerable.
4. You’ve heard horror stories
We’ve all heard about businesses that have made mistakes and faced massive penalties but these are often exaggerated.
If you plan ahead, you shouldn’t miss any deadlines, and if you miss a filing or payment deadline, the penalties are pretty reasonable.
As long as you’re not committing tax fraud, there’s no reason to add extra anxiety to an already-stressful responsibility.
5. You have too many other responsibilities
Many business owners who worry excessively about business taxes are simply distracted by other responsibilities. Running a business and taking care of a family is a lot of work, so, of course, the temporary addition of business tax planning seems like an obtrusive and unnecessarily complicated burden.
4 ways small business owners can make tax season easier
How do you make business taxes easier?
There are some important strategies you can use to make tax season much less complicated for your business:
1. Start early
The best thing you can do is start early. The deadline problem disappears if you start working on your taxes a few weeks, or ideally, a few months ahead of when you would normally start.
You’ll have much more time to gather records, check your numbers, find the right forms and assemble everything for delivery.
You’ll also be less stressed — and you won’t be as weighed down by other priorities and responsibilities.
2. Hire the right people
The right team can make a huge difference in how you prepare your taxes.
Hiring a professional accountant, or for larger businesses, an entire team of bookkeepers and accountants, can spare you the headache of trying to solve all your financial challenges on your own.
If you’re committed to doing the work yourself or if you can’t afford an accountant, make sure the people you work with — including contractors, vendors and clients — are open and transparent with their recordkeeping.
3. Keep consistent, accurate records
Accurate and consistent recordkeeping will make business taxes a breeze. The trouble is, you have to stay organized throughout the year.
Certain types of software, like Microsoft 365, can make it much easier to store your records in one place (and keep them properly organized so you can always find what you’re looking for). Just make sure you track all your financial information consistently, and back up your records in the cloud for security reasons.
4. Stick to a schedule
When tax season starts getting nearer, set a schedule for yourself. For example, if you know the deadline to send out W-2s is January 31, make it a point to send them by the 24th at the latest. Use mini-deadlines leading up to the 24th to keep yourself on track for that long-term goal. This will also force you to break each responsibility down into smaller, more easily digestible steps.
Business taxes don’t have to be taxing
There are some challenging elements of business taxes, but in reality, business taxes are simpler and more accessible than we make them out to be.
If you take your time, start early, hire the right people and prioritize keeping accurate, organized records, you’ll find yourself completing your tax obligations in record time — with minimal stress.