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.
1. Failing to Keep Track of Income and Expenses
This is a big one. You need to keep an accurate record of your income and expenses for tax purposes. 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, you need to organize your records so you can find them. You can do that easily by using ZenBusiness Money. Alternately, you can use a spreadsheet, accounting software, or a dedicated paper notebook to track your income and expenses.
2. Losing Tax Breaks Because You Didn’t Record Them
Every tax-deductible expense should be recorded on a timely basis. Keep all of your receipts and log everything at least once a week. ZenBusiness Money can track and tally tax deductible expenses for you, or you can manually enter them in a spreadsheet or other document. 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.
3. Not Taking Advantage of Incorporation
Many small businesses start off as a sole proprietorship and never consider incorporating or forming an LLC. 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.
Corporations and LLCs are legal entities that are separate from you, the owner of the business. Thus, operating your business as a corporation or an LLC helps insulate your personal finances and assets from loss if things go awry with your company.
In the tax arena, operating as an S corporation avoids the double taxation of C corporations, and allows you to reduce the amount of money you pay for Social Security and Medicare taxes.
As a sole proprietor, you pay Social Security and Medicare through the self-employment tax, which is assessed on all your business profit. When you operate as a corporation, you can split your income into two forms: salary and distribution of profits. Only your salary is subject to Social Security and Medicare taxes. The distribution is not subject to self-employment or FICA. tax (Social Security and Medicare for employees). Under IRS rules, you must pay yourself a “reasonable” salary, however.
Although LLC members are usually taxed like sole proprietors, the LLC can choose to be treated as an S corporation for tax purposes. Making that choice subjects the LLC to additional regulations and paperwork.
4. 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. You also will be required to pay income tax on the income from your business. Failure to plan ahead for these taxes has resulted in plenty of tax-time anxiety and heartache for the self-employed.
5. Missing Deductions
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:
- Startup costs
- Subscriptions to industry-related periodicals
- Software subscription fees
- Entertainment expenses for wining and dining clients
- Business-related vehicle expenses and travel costs
- Education and training (such as conferences, training courses, and workshops that are directly related to the business)
- Promotional items and advertising
- Internet and phone service
- Interest expense
- Office equipment, such as smartphones, tablets and computers
- Home office expense
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.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
By: Rick Klaras