This year’s tax season has finally been put to bed. And many people — both small-business owners and consumers — are breathing a collective sigh of relief. However, there is a fundamental difference between business and personal finances when it comes to taxes. While the “average Joe” may not have to worry about taxes again until next year, “Joe the small-business owner” needs to start thinking about his next quarterly tax filing now. Yes, for the small business owner, the taxman cometh four times a year.
While this is bound to cause anxiety, it doesn’t have to be overwhelming. With proper planning and the right financial tools, many business owners can approach each filing with confidence.
For the entrepreneur who has achieved this, I applaud you. And for the rest, to start you off on the right track for next year I’ve flagged seven financial faux pas that are commonly overlooked by small businesses.
1. Not keeping financial records up-to-date. This is the number-one mistake small-business owners make and also the most important to remedy. While it seems logical to keep records accurate, it is easier said than done. No one wants to pour over accounts payable, receivables and cashflow at the end of a long day, which is why this important part of the business is often overlooked.
One way to help manage this is to employ financial tools that do the work for you. The cloud has opened up a myriad of applications that can “speak to one another” and automate backend services. Additionally, the anytime, anywhere ability of cloud computing and smartphones makes it so you can update your books on the go.
2. Skipping the annual budgeting and financial forecasting. If you don’t have something to measure against, how will you know if you are on track? Data is knowledge, so create a simple plan based on your business insights and knowledge of market trends to forecast ahead and plan accordingly.
3. Not meeting with an accounting professional regularly. Remove some of the burden by working regularly with an accounting professional and use their expertise to your benefit. Indeed, a recent survey of 400 accountants by analytics company Zogby, found 65 percent recommend business owners meet with their accounting counterpart at least once per month to maintain good financial standing. (The study was commissioned by Xero.)
4. Misclassification of employees. This issue is becoming increasingly important as more businesses outsource jobs to contractors. It is also something the IRS has been paying close attention to, so be cautious! Misclassification can result in big fines and government scrutiny. Play it safe and classify accordingly.
5. Not incorporating your business. Not incorporating is not an option. Most SMBs choose an S.Corp or LLC filing because of tax purposes — meaning that you file your business taxes at the same time as your personal income taxes, but the entities are kept separate. This provides a little extra security in that, if something goes wrong with your business, you won’t lose your personal assets with it.
6. Incorrectly filing your business. Choosing the right business structure (i.e. LLC, S Corp. or Corp.) can be confusing, but it’s worth putting some thought into. Most small businesses opt for an S.Corp or LLC. It’s important to have an idea on how you want to structure your business and then file accordingly. But most importantly, make sure to file.
7. Mixing personal with business expenses. Small businesses are afforded tax breaks and write offs that are typically unavailable to the general population. These include home office deductions, mileage, some business meals, utilities and travel expenses. Make sure you are taking advantage of these and not leaving money on the table, but be careful not to over indulge, as excessive deductions are one of the biggest triggers of an audit.
Good financial health is something that needs to be fostered 365 days a year. Avoid the financial “sins” and use the proper financial structures to keep your company on the right path.