4 Small Businesses Accounting Mistakes Make That Make Tax Season a Nightmare
Though tax season is seen as a mad dash to the finish line, there are often a few hiccups along the way. Small businesses often make these common mistakes that can make tax season feel like a nightmare:
Poor organization and recordkeeping- Hanging folders stuffed with receipts and invoices - sound familiar? Many small businesses owners are unable to devote the time to effectively manage and organize records and documentation. When possible, automating accounting processes such as recording transactions or invoice creation is essential in ensuring the accuracy when entering tax season.
Lack of automation- As the business environment evolves, so do your accounting needs. If you are balancing your books using pen and paper, you run the risk of inaccuracy, double data entry and wasting precious time. Though some worry about the cost, utilization of digital accounting or payment software can save you time and money in the long run.
Failing to plan for tax season- Many businesses wait until the last minute to prepare for tax season, which can lead to errors, estimations, and a lack of funds available for potential costs. Try to approach all accounting matters as if you were preparing to submit an accurate depiction of cash flow, expenses, and deductions.
Not accounting for self-employment taxes- Often forgotten, self-employment taxes generally apply if you earn at least $400 in net income over the tax year. This includes both independent contractors and freelancers and can be accounted for as 15.3% of net earnings. The first portion, intended for Social Security, is calculated as 12.4% based on the quantity of your net earnings. Should your net earnings exceed the maximum amount subject to social security tax (subject to change each year), the amount over the maximum is not subject to social security tax. The second portion, however, is intended to contribute to Medicare (2.9%), and applies to all net earnings regardless of the amount. For example, if you earn $200,000 in net earnings, only $137,700 of it is subject to Social Security tax, as that is the maximum taxable income for the year 2020. This would amount to $17,074.80 for Social Security Tax. Medicare, however, would apply to all net earnings, which would be 2.9% of your entire net earnings, $200,000, which would amount to $5,800. Lastly, if you file as single, there is an income-based Medicare surcharge that could apply if you meet certain criteria. To prevent accumulating a large tax bill, you can make periodic estimated tax payments conveniently online, over the phone, etc. to the IRS.
Don’t let tax season sneak up on you. Keep these items in mind on a daily basis to remain accurate, informed, and prepared year after year.