Welcome to Bottomline Tax

How can taxes affect your bottom line?

I. Introduction

This website is all about taxes and how they affect your business. Taxes are the money you have to pay to the government so they can wisely spend it on infrastructure like roads, education, and health care. There are different kinds of taxes that you might have to deal with, like income tax, sales tax, property tax, and payroll tax.

You need to know how taxes impact your business’s profits. Profits are the money you make after you pay for all your costs, including taxes. Taxes can take a big chunk out of your profits. For example, say your business makes $500,000 in revenue and spends $300,000 on expenses. That leaves you with $200,000 in profit before taxes. If the corporate tax rate is 21%, you have to pay $42,000 in taxes (that’s $200,000 times 21%). That means your profit after taxes is only $158,000 (that’s $200,000 minus $42,000).

Understanding this relationship between taxes and profits can help you plan better, make smarter decisions, and maybe find legal ways to lower your tax bill.

II. Common Tax Mistakes Business Owners Make

1. Misunderstanding the Appropriate Business Entity Type for Registration

Picking the wrong type of business entity can make you pay more taxes than you need to. For example, if you register your business as a C corporation instead of an S corporation by mistake, you could get taxed twice. If your business makes $100,000 in profit, you could pay 21% in corporate tax, which is $21,000. Then, if you give yourself the rest of the profit as dividends, you could pay another 15% in personal tax, which is $11,850. So, the total tax you pay could be $32,850 instead of $15,000 if you had registered as an S corporation.

Choosing the right type of business entity can have a big impact on your tax liability. If you are not sure which one is best for your situation, you should consult a tax professional who can advise you on the pros and cons of each option.

2. Neglecting Proper Bookkeeping and Record Maintenance

Not keeping good records can make you pay more taxes than you should. For example, if you make a $10,000 error in your expenses because you didn’t keep track of them properly, this could make you overpay your taxes. If your business is in the 21% corporate tax bracket, this could mean an overpayment of $2,100.

3. Combining Personal and Business Expenses

Mixing up your personal and business expenses can make your tax returns inaccurate and get you in trouble with the IRS. For example, if you deduct $5,000 worth of personal expenses as business expenses by mistake, you could face a 20% penalty from the IRS. That would be a $1,000 penalty on top of the extra tax you owe.

Keeping your personal and business expenses separate is not only good for your tax accuracy, but also for your financial management. A tax professional can help you set up a system that makes it easy to track and categorize your expenses correctly.

4. Incorrectly Reporting Income

Not reporting all your income can get you hit with serious penalties from the IRS. For example, if you report $100,000 in income but actually made $150,000, you could face a penalty of 20% of the difference for being careless or breaking the rules. That’s a $10,000 penalty on top of the extra tax you owe.

5. Omitting to Declare All Income

You have to report all the money you make through your business on your tax return, even if it’s cash. If you don’t declare $10,000 in cash payments from customers, you could face a penalty of 20% of the difference for being careless or breaking the rules. That’s an extra $2,000 penalty on top of the extra tax you owe.

6. Delaying Recordkeeping Until Tax Time

Waiting until the last minute to do your recordkeeping can make your tax filing inaccurate. You should update your financial records regularly so you have accurate information when filing your taxes. For example, a $10,000 error in your expenses could make you overpay your taxes. If your business is in the 21% corporate tax bracket, this could mean an overpayment of $2,100.

7. Falling Behind on Tax Deposits and Estimated Tax Payments

Not paying your quarterly estimated tax payments on time can get you penalized. For example, if you owe $10,000 in taxes for a quarter and don’t pay it on time, you could face a failure-to-pay penalty of 0.5% per month. That would be $50 per month until you pay up.

8. Misclassifying Employees or Paying Them “Under the Table”

Paying your employees as independent contractors or under the table can get you in big trouble with the IRS. If you pay an employee $30,000 as an independent contractor instead of an employee, you could be on the hook for back taxes of 15.3% for FICA taxes. That would be $4,590.

9. Overlooking Deductions and Other Tax Benefits

Missing out on deductions and other tax benefits because you don’t know about them can cost you money. If you miss out on a $5,000 deduction because you didn’t know it existed, this could make you overpay your taxes. If your business is in the 21% corporate tax bracket, this could mean an overpayment of $1,050.

There are many deductions and credits that you might be eligible for, depending on your industry, location, and activities. A tax professional can help you identify and claim all the tax benefits that apply to your business, and make sure you don’t overpay or underpay your taxes.

10. Overpaying Taxes

Overpaying your taxes can hurt your business. If you overpay your taxes by $10,000 because you didn’t take advantage of all the deductions and credits you could, that’s money you could have used to grow your business.

11. Late Tax Filing

Filing your tax return late can get you penalized and charged interest. For example, if you owe $10,000 in taxes and file your return one month late, you could face a failure-to-file penalty of 5% per month. That would be $500 for just one month.

12. Not Seeking Professional Help When Needed

Trying to do your taxes by yourself can lead to mistakes. If a mistake makes you underpay your taxes by $5,000, you could face a penalty of 20% for being careless or breaking the rules. That’s an extra $1,000 penalty on top of the extra tax you owe.

How much would it cost you to make these 12 mistakes?

$24,390

This doesn’t have to be you!

It’s important for business owners to understand the impact of taxes on their bottom line and to avoid common tax mistakes. Bottomline Tax is a blog focused on tax-related topics that aims to provide helpful information to business owners and taxpayers in general, to raise awareness of tax-related pitfalls and tax-saving opportunities. Keep reading our posts to make yourself more tax savvy.

Our final disclaimer: The information provided on this site is intended for informational purposes only and does not constitute professional financial or tax advice. Always seek the advice of a qualified accountant or other qualified professional with any questions you may have regarding your financial or tax situation.