Common Mistakes Small Business Owners Make

Running a business is no easy task. There are tons of variables to consider for you to have a successful business. Around 20% of small businesses fail in the first year. By year five, around 50% of small businesses have failed. To help prevent a failing outcome, try to prevent the 11 common mistakes small business owners make below:

Choosing the wrong form of business

When starting a business, choosing a business structure is very important. Your form of business determines which income tax return form you must file. Common forms of business include:

  • Sole Proprietorship – Someone who owns an unincorporated business alone. A sole proprietorship reports income and expenses on Schedule C attached to Form 1040. A sole proprietorship requires no set up with the IRS and requires the least amount of recordkeeping.
  • Partnerships – A relationship between two or more people to do trade or business. Each person contributes money, property, labor/skill, and shares in the profits and losses of the business.
  • Corporations – Prospective shareholders exchange money, property, or both for the corporation’s capital stock.
  • S Corporations – Corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their tax returns and are assessed tax at their individual income tax rates.
  • Limited Liability Company (LLC) – A business structure allowed by state statute. Each state may use different regulations.

(Become familiar with the different business structures and choose which is best for you. It is best to stick with the simplest form of business that meets your needs.)

Waiting until tax time to catch up on record keeping

Waiting until your tax deadline to organize your records is a recipe for disaster. Try to organize your records, routinely. Waiting until the last-minute leaves room for errors.

Getting behind on tax deposits and estimated tax payments

Some taxpayers must make tax payments throughout the year. Taxpayers must generally pay 90% of their taxes through the year with “withholdings”, estimated tax payments, or both. If not, taxpayers may owe an estimated tax penalty. A federal tax deposit is money paid to the IRS through employee wage deductions. These taxes must be deposited to the IRS according to their requirements.

(Estimated tax is a quarterly payment of taxes for the year, based on income reported for the period.)

Paying employees as independent contractors or “under the table”

Some business owners try to avoid payroll taxes by paying employees “under the table.” That means they pay them in cash that is not taxed. Paying payroll taxes can be tedious and expensive. The government has rules on who must be considered an employee.

Missing out on deductions and other tax benefits.

Small businesses miss out on business deductions in several ways, including:

  • Losing receipts
  • Not tracking vehicle mileage
  • Missing out on potential energy credits
  • Missing out on perks for job-related education

(Proper record-keeping helps to avoid missing out on deductions.)

Final Word

Running a business can be a tedious, yet, rewarding experience. Being familiar with some of the mistakes that other business owners have made may help you make better business decisions moving forward.

References

https://blog.taxact.com/big-tax-mistakes-small-business-owners-make/

https://www.cnbc.com/2011/11/02/The-10-Biggest-Mistakes-Made-by-Small-Business-Owners.html

https://www.investopedia.com/terms/e/estimated-tax.asp

https://www.irs.gov/businesses/small-businesses-self-employed/business-structures#:~:text=The%20most%20common%20forms%20of,structure%20allowed%20by%20state%20statute.

https://www.irs.gov/newsroom/heres-how-and-when-to-pay-estimated-taxes#:~:text=Estimated%20tax%20is%20the%20method,also%20make%20estimated%20tax%20payments.

https://www.lendingtree.com/business/small/failure-rate/#:~:text=According%20to%20data%20from%20the,failure%20rates%20are%20fairly%20consistent.

Leave a Reply

Your email address will not be published. Required fields are marked *

x Logo: Shield Security
This Site Is Protected By
Shield Security