If you’ve ever wondered why your small business pays so much in taxes, maybe it’s because you need to hire a tax professional to help you avoid common mistakes. There are a number of mistakes businesses routinely make that cost them big money when paying taxes, such as not choosing the right entity type for their business, not paying as they go, not investing in the company, and not properly planning.
Why You Need a Tax Professional
If you’ve done your own taxes for years, you may think you don’t need to do this. A tax professional familiar with laws that apply to small businesses knows how the laws apply to you and knows how you can avoid the mistakes that will cost you money. A CPA will also do a detailed and thorough analysis of your business and can even represent you in an audit before the IRS, although his knowledge of tax laws may keep an audit from ever happening. In addition, even though many businesses do file their taxes successfully, they take a lot of unnecessary time in doing so. A tax professional can help you save time.
One Mistake A Professional Can Help You Avoid: Choosing the Wrong Entity Type
It is always best to discuss what type of structure is best for your business. Choosing the wrong type can cost you at tax time. Business owners who don’t seek the advice of a competent tax professional often make a number of mistakes, such as:
- Structuring their business as a LLC to save on taxes. Simply put, this does protect assets and is good for partnership relationships, but there are disadvantages for taxes. Business owners face the self-employment tax and taxes on appreciated assets.
- They structure themselves as a C corporation, because all fortune 500 corporations are C corporations. They think they will save on taxes. Actually, profits, under this model face taxes, and if business owners take profits home, they must distribute them and pay taxes on them.
- There are several other mistakes small business owners make, such as wrongly believing a sole proprietorship is always bad. Actually, for some, it is good, because you can save on self-employment tax by deducting half of it from your profit. This structure also has less legal formalities, but it doesn’t protect assets. Some small businesses will pay more under this model.
Actually, a tax professional can help you choose the best model for your business.
Another Mistake to Avoid: Not Paying As You Go
A tax professional could also help you make the mistake of not paying as you go. Simply put, this is failing to pay taxes by withholding taxes from wages and other payments or making quarterly tax payments. As a small business owner, you must pay the taxes almost immediately after earning income. Some small business owners don’t realize if they are self-employed, they must make the quarterly tax payments.
There are severe penalties for not paying your taxes for your small business. You can typically expect to pay a penalty to the IRS of 0.5 to 1 percent per month to an income tax bill not paid on time. This penalty is computerized and added automatically whenever a return is filed, without the full payment amount, or for a late payment. To make matters worse, you will pay even more for not making a payroll tax deposit on time.
Not Properly Planning
Not properly planning, by such things as not keeping tax diaries to document your travel, entertainment, and other expenses for the IRS can cost you a lot. Other mistakes include not planning include not hiring a tax professional, borrowing from employee withholding, which is illegal, giving yourself a huge raise the IRS considers suspicious after a good year, failing to claim all your allowed deductions, and wrongly designating everyone who works for you as an independent contractor, instead of an employee.
Invest In Your Company and Get Your Deductions
A tax professional will help you invest in yourself and your company and get all the deductions you are entitled to. This could include using depreciation rules for your benefit, claiming startup costs, claiming a home office deduction, and others.
For more information, feel free to contact us.