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The Biggest Mistake Business Owners Make on Their Taxes

Date: January 8, 2024

Tax Mistakes

Common Mistakes Business Owners Make and How to Avoid Them

Some of the most common mistakes we’ve seen business owners make on their taxes was due to no fault of their own. Besides the common misconceptions about the taxation process, there is a lot of confusing, complex information out there and if you’re not extremely familiar with the tax code, you’ll lose a game you didn’t even know you were playing. Taxes are a major expense for many small business owners.

Oftentimes, business owners spend so much time working on their businesses that they neglect to pay attention to the taxes they owe. This can lead to some big mistakes on your taxes, which will cause you to pay more than you have to – and when you’re growing a small business every dollar counts! In this blog post, we’ll discuss 5 ways you can avoid common tax mistakes that could be costing you money.

1. Choosing the wrong form of business:

This is the MOST common mistake I see business owners make that position them to overpay in taxes. There is no one-size-fits-all type of business structure, the proper business structure is determined based on several factors (taxable income, financial habits/practices, number of employees or shareholders, etc). Most small business owners either operate as a sole proprietor (one-man/woman-shop with independent contractors), or a Limited Liability Company (which slightly limits your exposure to liability). Other types of business formations are partnerships, Subchapter S Corporations, and C Corporations.

When most small business owners start out, they’re unsure of which structure to choose so they usually opt for the least confusing and easy to set up formations (sole prop/LLC/partnerships), which is usually fine (at first). But once the business starts growing it’s crucial to evolve the business formation as the business changes and grows, otherwise you’ll pay MUCH more in tax than you have to. Many of the clients we help with this save between 18,000 and 42,000 per year (IN TAXES ALONE). Those dollars are much more powerful when they are put back into the business or toward your future retirement than just writing a check to the IRS. If you are making more than 40,000/year (after expenses) and you have not changed your business structure, you can bet that you are overpaying your taxes and losing spending power.

2. Waiting until tax time to catch up on record keeping:

This common mistake is one of the greatest sources of stress, frustration, and fear that many small business owners experience each year. Not many of the prospective clients (or existing clients) we speak to ENJOY doing their back office responsibilities (like bookkeeping, record keeping, administrative work, etc). When a task is difficult or confusing, our natural, instinctual reaction is to postpone it, put it off for a later date when things are less frantic, or avoid it all together. The problem with this approach is that the tasks start to pile up, the ‘back burner’ boils over, and the snowball effect takes hold. By the time the business owner starts to untangle the neglected mess on their desk, they’ve racked up hours upon hours of work to do in several sittings.

Oftentimes, they get so overwhelmed and frustrated by all of the work that they either start guessing/estimating (which leads to tax mistakes that get caught further down the road and come back to haunt them years later), find someone to help them (and pay much, much more to have it ‘cleaned up’ than they would have had they addressed the issues sooner), or continue avoiding it all together (and rack up years of tax liabilities and penalties/interest). The skinny here is – don’t postpone for tomorrow what needs to be dealt with today.

If you are tracking everything on paper or in excel, or if you are handling your own record keeping but you’re not sure if you’re doing it right (or if your bookkeeper is doing it right) find a trusted advisor for a second set of eyes on your situation that can counsel and guide you in the right direction to REDUCE your taxes, grow your business, and your future wealth.

3. Getting behind on tax deposits and estimated tax payments:

This is another common issue we see with small businesses. Somewhere along the way, business owners start to fall behind on their tax payments (either because they can’t afford it, don’t have the money saved up, or simply forget). This creates a snowball effect where not only do you have to pay the taxes that are currently due, but also interest and penalties on the back taxes PLUS interest and penalties on the late payments. Suddenly, what would have been a manageable payment turns into a daunting amount that’s difficult to pay off. The best way to avoid this situation is to stay ahead of your tax payments by budgeting for them each month/quarter, setting aside money (each month) specifically for your taxes. This way, you’re never behind and you avoid the hefty penalties and interest that can add up faster than you may realize.

4. Paying employees ‘under the table’ or as independent contractors:

This is a HUGE mistake that business owners make, often without realizing it. When you pay an employee ‘under the table’ or as an independent contractor, you are not only cheating yourself out of payroll tax deductions (which can amount to thousands of dollars per year), but you are also opening up your business to a world of expensive legal issues and penalties. It is illegal not to withhold employment taxes from your employees and everyday more and more states are cracking down on this issue. By classifying an individual as a contractor, you are saying that they will be doing work for your business but can operate independently and offer their services to others (or even work for other companies at the same time).

In many cases, business owners have been fooled into thinking a worker was an independent contractor when in fact they were considered employees by the courts (and ended up owing significant back payroll taxes). An unexpected legal issue could cost tens of thousands of dollars that were not budgeted for. Avoid this mistake by ensuring that all of your employees are classified as employees and that you are withholding the appropriate employment taxes from their paychecks. If you are unsure of whether your workers should be contractors or employees, reach out to a trusted advisor for help.

5. Missing out on deductions and other tax benefits:

You don’t want to miss out on deductions and other tax benefits that are available for your business. There are many different types of deductions, credits, exemptions, exclusions etc…that you can take advantage of when filing taxes each year (and it’s important to understand how they work). For example, did you know that if your company is incorporated, you can take a deduction for the salary of the owner(s)? Or that you can deduct your health insurance premiums? There are many more deductions and benefits available, but you have to know about them in order to claim them. This is another area where it’s helpful to work with a trusted advisor who understands all of the different tax breaks that are available to your business.

When it comes to taxes, there are a lot of things that business owners need to know in order to avoid making costly mistakes. By working with a qualified advisor who understands your specific situation, you can ensure that you’re paying the least amount of tax possible and growing your business (and your future) in the process. These are just a few of the most common mistakes small business owners make on their taxes.

If you would like more information or specific advice tailored to your unique situation, please do not hesitate to reach out to us! We would be happy to help.



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