The Biggest Mistakes Entrepreneurs Make While Filing Taxes
Entrepreneurs are careful about keeping costs low with their businesses, but the truth is, they usually end up losing more money in lawsuits and other procedural mistakes. A lot of such mistakes are made when entrepreneurs file taxes for the business.
These mistakes might end up costing the entrepreneurs much more than they save. Here are the top three mistakes that entrepreneurs must avoid while filing taxes for their business.
Improper Classification of Workers
There are two ways entrepreneurs can classify their employees: either as independent contractors or salaried individuals. Classifying employees as independent contractors is cheaper for employers as they are not entitled to overtime wages or a minimum pay. This means that the tax which is deductible on the wages of these employees depends on their classification.
Unfortunately, there are no set-in-stone rules as to how employees can be classified, as the tax authorities do not consider many variables which are unique to every company’s circumstances. Jessie Seaman, a member of the Tax Defence Network which is a company that resolves tax disputes, offers a solution to this problem for entrepreneurs who are confused as to how to classify their employees: if the company cannot function without the worker, then that worker is a salaried employee and not an independent contractor.
Not Collecting Sales Tax on Sales Made Online
Most new entrepreneurs who are in the business of selling online fail to consider the importance of collecting sales tax on those sales. This is because online retailers such as Amazon do not charge sales tax on their sales. Now, if Amazon can get away with it, so can you, right? Wrong. Amazon, as a company, does not operate within a single jurisdiction, and hence is subject to different tax laws. Most entrepreneurs, on the other hand, have businesses which operate within a single tax jurisdiction, and hence are subject to sales tax law that requires them to collect sales tax on all businesses generated online.
According to the CEO of Santa Clara, Christopher McCauley, this issue will only become more aggravated once the Marketplace Fairness Act is passed. This act will make it compulsory on businesses, which were previously exempt from collecting taxes online, to collect sales tax on all online sales according to the tax rate applicable within the state the business operates in and mentioned in the requirements of the tax law.
Making Early Tax Deductions
Corporate tax laws give businesses many deductions when they incur losses or spend on expenditure which allows for deductions. However, these deductions cannot be made in the very year the business starts its operations, a fact many entrepreneurs forget when they file taxes. Not only are new businesses not eligible for tax deductions in the first year of business, they are also not allowed to make all deductions at once.
As soon as start-ups become eligible for tax deductions on their businesses, they must amortize the deductions over a period of 15 years after reaching the maximum deduction allowance of the first year. This means higher than anticipated tax cost, which entrepreneurs must consider while making business decisions.
A Few Other Points
Not all mistakes are those that pose audit risk. There are other things which you, as an entrepreneur, should be wary of in order to ensure you don’t get hurt by the taxes in the region of your business’s operation, and, in fact, take advantage of the deductions.
The law allows for a deduction of up to 9% to that income which is directly generated through product manufacturing within the United States. There is also a research tax credit of up to 14% of the total R&D expenditure, which is available to new businesses that are focused on research and development. There is also an interest charge allowance for companies that are in the business of exporting products and services. This allowance can reduce the tax applicable on export profits from 39.6% to around 23.8%.
Navigation is Key
The tax law is not only there to charge businesses for existing in an economy, but also to offer incentives to operate within a region. Tax laws are not the same everywhere, hence it matters where you open your business as then your business is subject to the tax laws of that region.
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