“If we can be a little more proactive about being prepared, we can save ourselves some wallet ache.”
You have to be aware of the traps in all aspects of your business that can cost you money. Business taxes come with a set of rules and regulations that seem to change every year. Morgan Ray of Bookkeeping for Trades shared the four biggest tax traps for contractors.
The time trap
Federal and state regulations require filings and payments throughout the year. Keeping track of the information about deadlines can feel like a full-time job.
Deadlines to lookout for are:
Income tax returns
Make sure you stay on top of your local and federal tax deadlines. The slightest oversight can cost you hundreds in penalties and fees. Make sure you are on top of your deadlines or at the very least requesting extensions before a deadline.
Morgan’s solution to the time trap is to set reminders, automate, and “go pro.” Professional help will go a long way as your company grows.
The team trap
Not understanding what constitutes a contractor versus an employee can have financial consequences. The government determines if someone is an employee through how much control your company has over their behavior, if they can work for another company, if the person carries a profit/loss risk when they take the job, and if they receive any type of benefits from working with your business. Failing to understand the differences and the tax responsibilities for each can carry severe penalties.
The self-employment trap
Your business structure decides the way you’re taxed at the federal and state levels. What’s right for you? LLC? Sole proprietorship? Partnership? S-Corp? Ray explains that S-Corp is the most popular business structure for small business owners because of the tax implications. However, she suggests that you apply for your LLC as soon as possible to protect yourself from any personal liability.
The paperwork trap
Morgan Ray explains that failure to keep track of revenues and expenses throughout the year can cause a ton of headaches. Ray suggests you divide your private and professional financial information and use software to track business cash flow that integrates with your tax preparation programs. Hearth Pay can help you keep track of your invoicing and payments through our easy-to-use tool.
Morgan recommends every business owner:
Makes a plan
Outsource and automate
Starts tracking ASAP
Morgan Ray is managing partner of Bookkeeping for Trades and Bookkeeping for Painters. Her company helps all types of contracting businesses take control of their finances. bookkeepingfortrades.com