Paying the least amount of taxes possible is a business owner’s dream come true. I know I love it and so do my clients! The problem is that many small business owners never achieve this because of poor business tax planning.
This year, I’m going to help you change that, but first, you will have to stop making tax planning mistakes. Here are the five top ones out there:
RECEIVING A REFUND CHECK
Getting back a big refund check isn’t necessarily a bad thing, but it also means you paid the IRS too much. IRS withholding is interest-free, so you’re not making money, while the IRS is sitting on your cash. This year, try to claim just the right amount. In the end, you’ll still get a small refund, but then you can use the extra money and invest or save it somewhere you can earn interest for it.
Small business owners need to pay themselves, but changing the amount significantly without reason could get you into trouble with the IRS. For example, if you pay yourself $50,000 then triple that to $150,000 the next year, you better have a good reason for the increase. If not, the IRS may not allow the compensation. If that happens, you may be taxed at the corporate level, which is then distributed as a dividend. Dividends can be taxed too. So here you’re looking at a double whammy!
POOR RECORD KEEPING
Here’s a mistake a majority of small business owners make. The IRS allows for a variety of deductions. For instance, you can deduct dry cleaning or laundry costs if you’re on an overnight business trip. Just make sure to keep the receipts and document the trip in a journal or tax diary. This way if the IRS questions you about the expense, you will have all the details about it.
BORROWING EMPLOYEE MONEY
Business owners are required to withhold money for things like Social Security. When employers get into a jam, some find themselves dipping into that fund. Don’t even think about it. You could face huge penalties from the IRS.
A lot of small business owners turn to independent contractors to help them with individual projects. Problem is, if those contractors turn out to really be employees, the IRS could sock you with a 100% penalty and require you to pay the employer portion of Medicare, Social Security and unemployment taxes.
The U.S. Tax Code is complex and ever changing. Our team at DM Accounting is always keeping up to date with the latest changes. So don’t be afraid to call or e-mail us with a question. Our job is keeping track of your books and taxes, so you can focus on what you do best.