Top Tax Mistakes Made by Startup Founders
Written by Baixue Ma, Tax Lead, airCFO
Entrepreneurs and the companies they create are utterly unique. But the mistakes they make when it comes to filing and paying business taxes aren’t usually as original. It’s common for company founders to make the same missteps as the entrepreneurs who have come before them. Some of those errors can wind up being messy, expensive, and stressful. But in the labyrinth of business challenges that aren’t predictable, most problematic tax situations are entirely avoidable, such as:
- Not being tax complaint with federal and state tax authorities
- Not hiring competent and reputable accounting and legal professionals
- Not setting up payroll properly
- Not reviewing the forms prepared by your tax accountant
Failure to File
One of the biggest transgressions any business owner can make is the failure to file income tax returns with the IRS and the applicable states. It can lead to the forfeiture of a company’s right to do business in those places. And that’s not all that might happen if you don’t meet the requirements of revenue authorities. One of my clients faced a nightmare scenario. Before coming to us for help, the business hadn’t filed any federal or state income tax returns since incorporating their company in 2016. Company officers couldn’t verify the information reported on Delaware franchise reports, because Delaware wanted to check the information against federal income tax returns. Delaware penalized the business by revoking its C corporation charter, a catastrophe of epic proportions for any business.
Hire Reputable Accounting and Legal Professionals
To avoid the stress of making similar mistakes with your own company, it is crucial to be aware of your tax obligations to various government entities. Choose your professionals carefully – there are some low-priced attorneys and accountants who might end up costing you more money in the long run than they save you in the short term. Work only with competent and well-respected professionals that you trust. For example, that cheap corporate attorney who at first blush seemed like a bargain could potentially botch the incorporation process by failing to select the proper type of entity or capitalization structure. Shoddy bookkeeping can also result in costing filing errors, when the bookkeeper doesn’t ask any necessary questions to perform due diligence. One common slip-up is the commingling of personal and business expenses. Business expenses should always be ordinary, necessary, and reasonable in amounts. Personal expenses such as a family vacation at a beach resort should never show up on the business books because this is bound to cause problems if a company is faced with an audit or a due diligence process. It is wise to be prepared for your business to endure this kind of scrutiny with confidence and competency.
Set Your Payroll up Properly
Setting up payroll is another potential pitfall. Many early-stage start-ups decide against using a payroll company in an effort to save costs, but this can lead to inaccurate deductions. Employment and payroll taxes are complicated and should only be handled by payroll professionals to ensure that deductions such as social security are done correctly. Failure to do so will cause problem for both the company’s business taxes as well as the employees’ personal taxes. Further complications can arise when employing people remotely, an issue that has become much more common during the pandemic. Every state has its own tax laws pertaining to remote workers. Most states require workers to pay taxes based on where they performed the work, while a smaller number of states demand workers be taxed based on the location of their employers even when workers are remote. Some states have created COVID-19 exceptions so employers won’t be taxed in states where their only presence is an employee working there temporarily because of the pandemic.
Review Your Tax Filings
Perhaps most importantly, you should always be aware of what your tax accountant is filing on your behalf. It is crucial that you carefully review your tax returns before they are filed and ask any questions you have. Your accountant will ask you to sign an e-file authorization form before your returns are filed, and your signature verifies to tax authorities that you have reviewed the information it contains. Although competent tax accountants always strive to ensure accuracy, they are human beings capable of making mistakes, particularly during crunch time when they are working long hours to meet tight deadlines for their clients. And even if the information you gave to your accountant was correct at the time you provided it, circumstances can change rapidly in your business. You are the best person to know if every piece of information is still accurate and current on the day your returns are filed. Your tax accountant will appreciate your help, and together you can ensure you are meeting all the tax obligations of your business.
airCFO’s tax team prides itself in leaving no stone unturned when it comes to compliance for our clients. We’d love to help you out too. If you have questions about taxes, R&D studies, deadlines or even international filings, please schedule a call with us, so we can learn more!
Author Note: Baixue leads up the tax team at airCFO. She is a CPA with extensive experience advising startups, and previously worked in a regional CPA firm and a Big 4.