According to the Kauffman Index on startup activity, there has been a 10% increase in the rate of new entrepreneurs in the US in 2015. That translates into more than a half million new business owners each month.
With the formation of that many new startups, there are bound to be quite a few businesses making tax mistakes. We want to help this year’s crop of new business owners avoid the most common pitfalls of accurately keeping track of their taxes. To keep you from making the same mistakes as your entrepreneurial predecessors, we’re going to discuss seven common tax mistakes startups must avoid.
#1: Not Paying Your Quarterly Taxes
Startups, freelancers, and self-employed sole proprietors are all required to pay taxes on a quarterly basis unless they qualify for an exemption.
To avoid any problems down the road, it’s a good idea to make a habit of paying your quarterly taxes. This makes meeting your tax bill easier as it’s broken up into four quarters. If you need help estimating your payments, seek out advice from an experienced professional.
#2: Not Keeping Track of Expenses
No matter the size of your business, you’ve got to properly keep track of your business expenses. If you don’t have any receipts to show for your expenses, you are simply leaving money on the table at tax time.
You must have adequate documentation to deduct these items. Receipts to keep include gas and meal receipts. File your equipment fees and office supply receipts as well. Use your cell phone for work? Keep track of those receipts.
You can keep track of all your expenses with online accounting software. Take pictures of all of your receipts and store them in the cloud for easy retrieval.
#3: Failing to Take the Home Office Deduction
Sure, the rumor is that taking the home office deduction is an audit red flag, but we haven’t found this to be true. If you use a space in your home exclusively for work, it really pays to take this deduction.
You can deduct portions of your rent, mortgage, utilities, and insurance if you qualify. Read the fine print to ensure that you do indeed qualify to take this deduction.
#4: Claiming Equipment as Supplies
You don’t want to get mixed up when claiming equipment and supplies. If you do, the IRS could come back and tell you that you have miscategorized the expense, and you won’t be able to take the deduction.
Equipment is an item that you’ll use for more than one year. It constitutes a capital expense such as computers, desks, chairs, and your network server.
Supplies are more disposable items such as pens, paper, notebooks, ink cartridges, paper clips, kitchen supplies, toilet paper, etc.
Take full advantage of these deductions to take a bite out of your taxes.
#5: Mixing Business with Personal Taxes
As a new startup, it can be hard to separate the two, especially because you probably invested a lot of your own money to get your idea off the ground.
To make tax time easier, it is helpful if you’ve separated the two from the start. For example, you need two bank accounts – one for personal and one for business use.
#6: Choosing the Wrong Legal Structure
How you define your startup affects how much taxes you’ll pay at the end of the year. You must choose the right entity. This could be any of the following:
- Sole Proprietor
- C Corporation
- S Corporation
Don’t be afraid to ask for help with this. It will save you headaches in the long run.
#7: Forgetting to Send 1099s
Do you pay contractors, attorneys, or freelancers? Did you pay any of them more than $600? If so, you are legally obligated to send them a 1099.
If you forget to file your 1099s on time, you’ll get a $250 penalty for each form. This is an easily avoidable, yet costly, mistake.
It’s easy for even the savviest startup to stumble when it comes to paying taxes.
As a new business owner, you want to take your taxes very seriously. You don’t want to leave money on the table, and you certainly don’t want to end up with heavy penalties or legal problems.
This article sheds some light on how to handle your tax obligations properly. We highlighted the seven common tax mistakes startups must avoid.
Yet, as a new business owner, we understand that the day-to-day operations can be overwhelming, and throwing in taxes can be downright daunting.
We encourage you to seek out help when it comes to your taxes so you can avoid any problems come tax time.
If you’re ready to get your startup off the ground, we are here for you. We can help answer your questions and guide you through the process. Outsource your finances, payroll, HR duties and more to us. Contact Escalon today to get started.
Image: SHUN [iamtekn] via Visual hunt / CC BY-ND