As a startup, your biggest goal should be to lower your tax bills by avoiding tax audits, fines, and penalties from the taxman.
Think of it like this, if you are paying huge penalties due to tax mistakes, how else are you going to make money or grow?
Luckily you don’t need to be an expert to plan and avoid common tax mistakes. You simply need to be aware of the slips and keep them at bay.
To help you stay on top of your startup tax, let us get you acquainted with common mistakes that you ought to avoid.
1. Failing to Separate Business and Personal Expenses
As an entrepreneur running a startup, you might struggle with separating your business and personal finances.
It’s common to find many startup owners mixing business finances with personal ones.
Well, sadly, once you are a registered entity, you are expected to be accountable.
Remember, if you are found commingling, you will be forced to pay extra money or even face deregistration.
So, start by obtaining an Employer Identification Number (EIN) from the IRS so that you don’t use your social security number in business tax.
2. Not Knowing The Correct Legal Entity to File
Did you know that the business structure of your enterprise determines how you file and pay your taxes?
For instance, filing as LLC is different as filing as a sole proprietor; several factors come to play.
You must take the time to understand your business legal structure to avoid problems.
Filing taxes on the wrong entity could lead to serious tax problems in the future.
You don’t have to be tax-law savvy. Just talk to a reputable tax attorney for guidance and help at the early stages of the business setup.
An attorney will also come in handy in correcting mistakes in case you have been filling with the wrong entity.
3. Not Understanding Your Tax Obligations in Every State
As a startup, you are legally obligated to pay taxes in every state your business operates.
However, evading to pay taxes in other areas of operation is a common mistake many startups commit.
For example, if you have employees (contracted or full time) working in different states with no physical office, you are expected to file their returns, including the sales tax in the state they are in.
You need to be conversant with the laws of every state before doing business.
This way, you will know your expectations, pay your dues, and avoid trouble
4. Improper and Fraudulent Tax Submissions
One mistake you want to avoid as an entrepreneur is to be labeled a victim of improper and fraudulent tax submissions.
Unscrupulous tax activities such as overstating deductions, including credits you are not supposed to receive, and padding business expenses are considered criminal activities.
Some of the consequences for incorrect and fraudulent returns include;
- Penalty for filing an erroneous claim for a refund or credit
- Punishment for a frivolous tax return ( Frivolous is an amount showing tax represented as incorrect)
- Underpayment penalty for the tax fraud
- Criminal prosecution for fraud and false statements, fraudulent return and identity theft, failure to file a return and supply information
5. Missing Deadlines and Quarterly Filing
This is another common mistake committed by most people. It is usually a result of not understanding tax obligations in the area(s) of operation.
A good example is a business that fails to remit their quarterly taxes like sales tax, income, and payroll tax because they were unaware of the quarterly filing obligation.
On the other hand, failing to keep tabs with the taxman’s deadlines could result in a hefty fine, not to mention the accounting fees to get everything cleared up.
6. Failure to Track All Financial Transactions
Sometimes the tax mistake is a result of not tracking all your financial transactions.
Not being able to separate the revenues earned from expenses incurred leads to tax problems.
For example, failing to include all ordinary and necessary business expenses can take a toll on your finances.
Invest in systems that allow dual entry accounting and track those transactions.
You might also want to hire someone to handle all your tax matters. This will take away the pressure and focus your effort on business growth.
As you might have noticed, some of the tax mistakes are kindled from ignorance and lack of proper knowledge on tax matters.
Sadly, tax problems can impact your company negatively. So, don’t let your startup struggle with tax matters that can be avoided.
Work with the right tax professionals who can help you stay on the right side of the law.