When it comes to running your own business there are various responsibilities that you have to deal with beyond daily working hours. From where to get the money to start it and how to keep cash flow running to what to sell and how to market it, the tasks that new business owners must take into account are numerous. Among these is the proper payment of taxes. Many fledgling entrepreneurs, however, are so busy wearing many different hats and are focused on so many different things that they overlook simple steps that can save them money when it comes time to pay Uncle Sam on April 15.
Jessie Seaman, a licensed tax professional with the Tax Defense Network, offers some advice at BuisnessNewsDaily.com, regarding the biggest tax mistakes entrepreneurs make, including:
Employee versus subcontractor: When a business pays individuals for work done for the benefit of the business, they are either paid a 1099 or W-2. Employers sometimes have a difficult time determining whether to categorize the worker as an independent contractor or as an employee that should be on payroll. If the IRS determines the worker is an employee rather than a contractor, costly penalties are assessed and a large tax bill will result due to unpaid Social Security and Medicare.
Commingling: Keeping business income and expenses in a separate account from personal income and expenses is key. The business bank statements should be solely used for business expenses, and no personal charges or withdrawals should occur. If business and personal funds are commingled, the owner/shareholders/members could find themselves on the hook for business tax debts.
Payroll: Paying employees can be complicated and takes a significant amount of time to do if you are not a professional in the field. Each employee must complete a W-4 for federal withholding. The employer must match the employee’s Social Security/Medicare payments and this money must be deposited weekly, monthly or quarterly with the IRS. If the deposits are made one day late or are for an incorrect amount, hefty penalties are assessed. Unemployment returns must be paid, and states and localities that have an income tax also require regular deposits and filings. W-2 and W-3 forms must be filed with the U.S. Social Security Administration annually as well.
Accounting: Many business owners do annual accounting to prepare their tax return, but how does the business know how much money it is making throughout the year? A profit and loss statement should be updated every month so the business can easily see where money is coming in and where money is bleeding out. Â In order to maximize profit, a business owner needs to have a clear idea of how the revenue is being spent and what can be cut back.