Small business owners usually do not think about taxation before setting up their company, leading them into avoidable tax problems. Therefore, as a new or veteran entrepreneur, you must prioritise the tax-related aspect of your business to avoid overwhelming bills and sanctions.
This will help you in saving money and channeling the funds to achieve more business growth. Government agencies at various levels administer various tax rates with unique sets of rules and payment methods.
As such, there is little wonder why SMEs encounter major tax issues due to non-compliance. The paragraphs below would outline the major tax issues faced by small business owners.
Ignorance about Business and Tax Classification
A company files and pays taxes based on its category. For instance, established corporations are required to pay corporate income tax, which is often a flat rate. This means that the amount of tax they pay is unchanged, regardless of the income they earn.
Every business owner should endeavour to know the class his company falls under to avoid complications caused by tax compliance. If you own a small business, the tax you pay would most likely depend on your personal income. Here, the amount you earn defines your tax rate and can range from 0% to any rate decided by the tax board as your business grows.
This is a mistake made by almost every small business and this heaps a pile of tax for them to pay. There are common occurrences where companies classify freelancers as employees and end up paying unnecessary income taxes. Also, misclassifying a full-time employee as a freelancer will get you charged for tax fraud.
Government agencies can easily identify any misclassification issues through audits triggered by extremely low tax remittances. Some consumer product companies also make the mistake of setting their prices in a way that implies that an employer is keeping back payroll taxes.
But since a small business owner is responsible for everything related to payroll taxes, he will have an overwhelming tax liability in the long run. This problem could be avoided by knowing the categories which everyone in a company falls under and file taxes with that knowledge.
Underpaying Tax Due To Poor Record Keeping
A business owner that does not properly keep records will encounter unimaginable problems while filing taxes or during audits. He will be unable to explain any deductions or expenses because there are no receipts.
There have been many cases where entrepreneurs collect sales tax from consumers but fail to remit it to tax boards, thereby leading to underpayment. Frequent underpayment of taxes can hurt a business because it will end up paying inflated taxes in the long run, leading to slow business growth. After all, overall income will be reduced.
Entrepreneurs can make tangible efforts to keep themselves out of tax agencies’ bad books. One of the best preventive measures is engaging the services of a tax professional, which may seem expensive; however, it is less costly than making tax-related mistakes.
Keep proper records, gain more insight on taxation from informative finance blogs, and know your business classification and group employees under the right categories and you will surely avoid the hammer of tax boards.
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