“If you fail to plan, you are planning to fail.” – Benjamin Franklin

Founding Father Benjamin Franklin’s admonishment continues to hold significance more than 100 years later and can certainly be applied to business strategies such as finances and accounting. While failure is a strong word, overlooking certain financial and tax responsibilities can lead to unnecessary stress, fees, penalties, or missed opportunities. Proactive planning in several key areas can help you avoid costly mistakes.

Overlooking Accurate Record-Keeping

Poor record-keeping is one of the most common tax pitfalls for businesses. Without detailed financial records, it’s easy to miss deductible expenses or inaccurately report income, which can lead to fines or even an IRS audit. Is bookkeeping glamorous? No, but going through the effort to keep everything organized is worth it!

Avoid a last-minute scramble by:

• Tracking business expenses
• Organizing receipts

Misclassifying Employees

Misclassifying employees is a major legal and financial liability for companies. Misclassification occurs when a company pays an individual as an independent contractor but treats them like an employee. Employers pay taxes for W-2 employees, including Social Security, Medicare, and unemployment taxes. When an employee is given a 1099-NEC instead of a W-2, the employer isn’t paying any of those employment taxes.

If it’s determined that an employee should have been classified as a W-2 employee and wasn’t, the IRS will require the company to pay those missing employment taxes, plus penalties and interest.

The IRS uses these three common law rules to help define the differences between employees and independent contractor:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of relationship: Are there written contracts or employee type benefits (that is, pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Missing Out on Deductions and Credits

Sometimes business owners leave money on the table by not leveraging all the tax deductions and credits available to them. These reduce taxable income and owed taxes, respectively. 

A common oversight is deducting certain expenses on the personal side instead of through the business, like property tax on business real estate. Taking it as a business expense not only reduces your income tax, but also your self-employment tax and AGI (adjusted gross income), opening the door to additional benefits.

Blurring Personal and Business Finances

Mixing personal and business finances is a frequent error that can create confusion during tax season and may even raise red flags for auditors. Using separate accounts for personal and business activities offers clarity and protection. Separate accounts have multiple benefits:

• More quickly determine which business tax breaks you qualify for
• Protects your personal liability
• Helps you build good business credit
• Removes this common audit trigger from your person/business

Missing Estimated Tax Payments

Business owners who don’t pay quarterly taxes on time often face large year-end tax bills and avoidable penalties. The IRS requires quarterly payments if you expect to owe the following amounts in income tax:

• For individuals, sole proprietors, partnerships, and S corporation shareholders: $1,000
• For C corporations: $500

To make sure your business pays its quarterly estimated taxes on time, follow the IRS schedule of deadlines:

• April 15: Q1 estimated taxes due (tax on income earned January 1–March 31)
• June 15: Q2 estimated taxes due (tax on income earned April 1–May 31)
• September 15: Q3 estimated taxes due (tax on income earned Jun 1–August 31)
• January 15: Q4 estimated taxes due (tax on income earned September 1–December 31)

Pro tip: Don’t confuse estimated tax with employment tax.

Missing Tax Filing Deadlines

Late tax filings can lead to penalties, interest, and even delayed refunds. Worse, consistent delays may attract unwanted attention from the IRS.

Plan Ahead Now, Hire an Accounting Partner

Entrepreneurs often tax a DIY approach in many aspects of their businesses, but expert guidance is invaluable when it comes to tax preparation. Business tax filings are more intricate than personal returns, and mistakes can be costly. Engaging with an accounting firm such as Specialized Accounting Services offers many advantages:

• A tax partner who will help keep you on track with filings and payments
• A tax partner who will provide accurate and on-time financials
• A tax partner who will remain up-to-date on compliance and tax issues in today’s ever-changing business climate
• A tax partner who is your first line of defense against an audit
• A tax partner who can do more than just accounting and tax compliance, such as business consulting and succession planning

Are you looking to engage with a tax professional for your business or franchise? Specialized Accounting Services is here to help! Complete the contact form on our website to get started!