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How to Avoid Costly Errors When It Comes to Your Taxes

Dealing with business taxes for the first time in your life can be overwhelming, especially with the risk of expensive errors that may lead to fines, penalties, or delays in getting your business off the ground.

Many new entrepreneurs unknowingly make mistakes during their first year in many critical areas of business taxes. So here’s a guide on how to avoid these pitfalls and make sure your tax season goes as smoothly as possible.

Know When You Need an EIN and Apply Early

An Employer Identification Number (EIN) is essential for most businesses, even if you don’t have employees yet. It’s needed for tax filing, opening a business bank account, applying for business licenses, and much more. Yet, many first-time business owners overlook the need to apply for an EIN until the last minute which can end up delaying other processes.

While you can apply directly with the IRS for free, several third-party services offer EIN application assistance for a fee. These services can be beneficial if you find the IRS forms confusing or if you’re worried about making a mistake.

However, always check that the service is reputable and charges fair fees; some companies charge a premium for the application without providing much added value. There are also IRS EIN application services online for U.S. residents, and in most cases, you can obtain one instantly.

coffee mug near open folder with tax withholding paper

Classify Your Business Entity Correctly

When applying for an EIN and filing taxes, your business’s structure (LLC, corporation, 

sole proprietorship, etc.) affects how you’re taxed. Each structure has distinct tax obligations, filing requirements, and benefits. Many first-time business owners select a structure without understanding the tax implications. Misclassifying your business entity can lead to higher taxes or missed deductions which can end up being costly mistakes.

While it can be tough to understand all of the financial jargon, researching or consulting with a tax advisor on the best structure for your business can save you money and ensure you’re in compliance. Once you’ve determined your structure, make sure to communicate it correctly when filing with the IRS and other agencies.

Keep Accurate and Organized Financial Records

Maintaining well-organized records is vital for a smooth tax process. Mixing personal and business expenses, failing to track income properly, or neglecting to keep receipts can make tax time a nightmare and increase your chances of making costly mistakes.

First-time business owners often overlook the importance of using dedicated accounting software or professional bookkeeping services to manage their finances. With a solid system, you can easily track your income and expenses, categorize business costs, and be better prepared for deductions.

Stay Updated on Tax Deadlines and Pay Estimated Taxes

Missing tax deadlines or failing to pay quarterly estimated taxes (if applicable) is another common misstep. Business owners, especially those with significant income, may need to make estimated payments quarterly. Failing to do so can result in penalties, which add up over time.

Using reminders, a calendar, or automated tools can help you stay on track with due dates for estimated taxes and annual filings. Setting up these reminders early in the year is a simple way to avoid unnecessary penalties.