Wait… Which Form?
If you’re just making the leap to self-employment, then preparing your own taxes can be quite confusing. Filing taxes as an employee is considerably different than filing as a business owner. You may want to enlist the help of a professional, but if you decide to go it alone, here are some common tax mistakes to avoid.
Failing to Keep Track of Income and Expenses
This is a big one. If you don’t write it down, you’re liable to forget plenty of things. It’s also a bad idea to attempt to log this information on random post-its and napkins. Instead, keep a dedicated notebook, or better yet, a spreadsheet to track your income and expenses.
MAKE SURE YOU TAKE ADVANTAGE OF ALL THE TAX BREAKS YOU CAN…
Keep all of your receipts and log everything at least once a week. Make sure you enter the amount, date, and purpose of your expenses. Having everything logged, organized, and in one place will go a long way in making tax time easier and less stressful.
Not Taking Advantage of Incorporation
Many small businesses start off as a sole proprietorship and never consider incorporation. Depending on the size and scope of your company, being a sole proprietor may be the best option. However, you owe it to yourself to at least research the benefits of incorporating.
One of the best things about incorporating your business is that it has the effect of insulating your personal finances and assets. Therefore, creditors won’t be able to come after your personal property if things go awry with your company.
In the tax arena, incorporation makes sense in that it allows you to avoid paying the dreaded self-employment tax. This tax can be in excess of 15%, and that’s on top of the income tax that you already pay!
Not Setting Money Aside for Taxes
Speaking of the self-employment tax, many sole-proprietors face a rude awakening at tax time if they fail to put money away ahead of time to fulfill this tax obligation. While half of your self-employment tax is deductible, it must still be paid. Failure to plan ahead has resulted in plenty of tax-time anxiety and heartache for the self-employed.
This is a very common tax mistake made by the self-employed. You don’t want to give Uncle Sam any more than you have to, do you? Make sure you research and take advantage of all of the tax breaks available to your business. Some commonly missed tax-deductible items are:
- Subscriptions to industry-related periodicals
- Entertainment expenses for wining and dining clients
- Business-related vehicle expenses and travel costs
- Promotional items and advertising
- Internet and phone service
- Office equipment, such as smartphones, tablets and computers
Make sure you take advantage of all the tax breaks you can. If you don’t, you might as well be throwing money out the window.
By: Rick Klaras