The government classifies businesses as private entities set up for personal gain. But the reality for many owners is different from that. Most leaders are shocked to find just how much they have to follow what the authorities say, not what their business sense tells them.
Nowhere is more accurate than in the world of taxation. The government loves businesses because of the juicy taxes they generate to fund their programs and projects. And that brings risks. When it comes to paying Uncle Sam, you don’t have a choice.
As Takakjian & Sitkoff, LLP points out, the risk of white-collar crime is high in this area. Well-meaning businesspeople doing what they think is best for their enterprises can often find themselves falling foul of the law.
In this post, we take a look at some of the mistakes you’re probably making about tax without even realizing it.
Incorrectly Classifying Employees
As a businessperson, you need to understand the difference between an employee and a contractor. With employees, you pay their tax bills directly out of their wages before receiving their pay. With contractors, you pay them the full fee, and then they get third-party accountants to file their accounts on their behalf.
Companies, however, often misclassify employees and contractors, and that can lead to trouble. If you have a contractor who is an employee in all but name, you could be liable to pay additional fees and costs.
Failing To Save Up For Taxes
It can be tempting for businesses to reinvest profits as soon as they get money through the door. After all, acting fast puts you at a competitive advantage.
However, that strategy can backfire. Many companies find themselves in a situation where they’ve spent all their money on equipment and don’t have enough cash left over to pay Uncle Sam. And when that happens, it can lead to deteriorating relations with the IRS – not what you want.
Ideally, you should have a conversation with your accountant about the amount of money you should be paying to the authorities and saving up each month. Usually, they’ll be able to provide you with a budget and show you your target amount to set aside each month.
Failing To Factor Hidden Costs
Even when you plan for tax expenses, you often wind up running out of cash in your bank account because of hidden costs.
Remember, running a business has all sorts of strange expenses associated with it. For instance, it costs a small fortune to recruit staff if your employee turnover is high. You may also run into payment delays if clients aren’t paying you on time. Even simple things like repairing office equipment eats into your bottom line.
Failing To Stay On Top Of Your Bookkeeping
Ideally, your bookkeeping should always be up to date so that you know your current financial position. But for legal reasons, you need an audit trail the authorities can follow to check you’ve paid the right amount of tax on your profits. Make it a habit.