Most common tax mistakes made by small business ownersPublished:
Do not let these tax requirements surprise you!
You may look at your small business as a temporary substitute for full-time employment. A lot of successful sole proprietors start out this way. But unfortunately the government does not make a distinction between an independent contractor who takes a full-time placement nine months into self-employment, and the professional who ends up starting a successful company.
Both are required to pay taxes on all contract-business.
READ: Five tax tips for small businesses
Here are some of the most common pitfalls and how to steer clear:
Common mistake – Pricing like your client is paying your payroll taxes
When you earn income from an employer, half of your payroll taxes (more than 7%) are paid out by the employer. Contractors are required to remit the entirety of their payroll tax obligation. Forgetting this substantial figure can set you up for failure, later, when you file your taxes and realize you owe a hefty sum of money – money that you already spent.
The extra tax burden is a reasonable cost of doing business and should be wrapped up in your asking price for services/goods. By factoring the full cost of taxes into your price, you are properly accounting for the taxes you expect to owe. And you will be prepared for the other tax burdens that go along with operating a small business.
Believing estimated tax payments are optional
Employees' taxes are automatically withheld from each paycheck, but you might not have paid attention because no action was required on your part. So when you transition to remitting your own taxes, estimated tax payments can seem burdensome and downright superfluous. It is important to know that estimated tax payments are mandatory, and lack of payment on time, and in the right amount, can result in penalties and interest. These inflate your taxes at year's end, slowing down your business growth or eating into your pocket change.
The worst-case scenario results in even more burnt cash. In the event you cannot pay your full tax obligation at year's end, interest accrues at a sinister monthly rate. The penalties for not filing are even higher.
READ: Filing a tax extension for small businesses
Unless you are an accountant, the new financial obligations of running a small business can take a lot out of you, but there are a number of great and even free accounting solutions at your disposal. Take a look at Wave and GnuCash, or simply Google, "Free Small Business Accounting Solutions" for the most recent software. If you have employees, or the administrative side of your business outgrows the free software, then you might hire an accountant or try some of the more costly solutions out there.