Why are so many small business owners truly concerned about tax time? Hard work and determination may be essential to small business success, but what is often forgotten about are smart planning and record-keeping - particularly when it comes to small business tax. To set you up for success, we’re going to uncover the most common tax mistakes made by small business owners - and tell you how to avoid them.
One in three new small businesses in Australia fail in their first year
, more than half close their doors by the end of their second year. Did those who didn’t make the cut simply not work hard enough? We beg to differ. The truth is, a lot of small businesses don’t think about their tax situation until it’s too late. "Out of sight, out of mind” seems to be the motto many small businesses owners follow when it comes to payroll tax, super guarantee contributions and GST. Many struggle to estimate how much tax they’ll owe the Australian Taxation Office (ATO) at the end of the financial year.
As reported in the Sydney Herald in 2019, small business owners failed to pay more than $11 billion in tax
over the course of a financial year. But people weren’t deliberately withholding payments or underreporting their income. The ATO blamed honest mistakes and poor record-keeping on the business owner side for the discrepancy. According to the taxation office, the main contributors to the small business tax gap included omitting income and over-claiming deductions.
If you’re now wondering "But how can we do better in the future?”, we’ve got you covered. To start with, you need to know where things usually go wrong. So, in today’s post, we’ll take a look at the top six tax mistakes small business owners make and how you can avoid them.
Tax mistakes small business owners commonly make
1. Not using a tax agent
Many small business owners believe that they are not making enough money to warrant hiring a tax professional and think they don't require a bookkeeper's assistance
until they’re making enough revenue. However, no matter your management and bookkeeping skills, it isn't easy juggling multiple roles.
Some small business owners believe they can run their business, manage employees and tend to customers all at once. Very few can wear all these hats and at the same time run a successful company - which is exactly why tax agents exist
: To help you do better and prevent you from making unnecessary mistakes.
Tax mistakes can become fatal for small businesses, but the good news is they’re avoidable. Don’t end up wishing you had sought accounting help earlier. Instead, contact the tax experts at Shoebox! Our helpline service gives you access to our tax specialists across Australia
. They’ll help you avoid regrettable scenarios, every time.
2. Not keeping track of changes to tax laws
Australia’s tax laws are constantly changing and with so many things on your mind (and your to-do list), it can be hard to keep up. Some changes can mean you’ll have more money in your pockets, others might cause a rude awakening if they’re overlooked. As an employee, you don’t have to worry about most of these things, as someone else is taking care of it for you.
But if you are the one employing people, they trust you to do your due diligence
. For example, were you aware that awards are updated twice a year? If you miss out on these changes, you could end up underpaying your staff and might not withhold enough money for tax time. At the end of the financial year, this can cost you thousands of dollars - not to mention that you’ll lose your employees' trust.
If you’re not following tax law closely, it’s likely you’ll miss things. Luckily, our blog can help keep you up to date
on everything tax, bookkeeping and small business management related!
3. Poor bookkeeping management
A lot of tax mistakes happen because business owners are disorganised. Poor bookkeeping or worse, no bookkeeping at all, can take you into dangerous territories. Small businesses are required by law to keep financial records
of all the transactions that are being made - both your income and expenses. It's important to remember, for purchases over $82.50, you need to have a tax invoice if you're wanting to claim it as a business expense.
Not only that, but you also need to keep those records for a minimum of five years. Otherwise, you might get caught claiming something you do not have records for. On top of that, by not keeping proper records of your financial transactions, you could miss out on claiming the valuable tax credit. So, it’s not only important to understand what documents you need to keep, but to organise them in a way that makes sense to you - even if it’s just a shoebox.
4. Failing to record sales through a cash register
If you own a retail or gastronomy business, you’re probably already aware of this common tax mistake: Taking cash from a customer and then not putting it through the register. Again, businesses have an obligation to keep records for all transactions, both revenue and expenses. Otherwise, you’re risking legal and financial consequences. Another common mistake is to take cash money out of the register throughout the day to pay for a refund or personal use and fail to reconcile the difference with the cash register tapes at the end of the day.
5. Not getting the status of your workers right
As a small business owner, you can quickly find yourself in hot waters if you don’t get your employee’s working status correct. Many small businesses try to pay their employees as subcontractors, in order to avoid superannuation, sick leave, holiday pay and payroll tax
But, if someone shows up at their place of work at set days and hours, works under supervision, has an ongoing expectation of work and doesn’t carry any of the financial risks associated with the work they do, they are in fact to be considered employees.
The risks of getting it wrong are high: You could be breaching workplace relations as well as taxation, superannuation and workers’ compensation obligations. If this could affect your business, now is a good time to review your arrangements and make sure that you have correctly engaged employees
6. Managing tax obligations on time
If you’re running a tight ship, staying on top of your budget is crucial to success. It starts with knowing when your tax is due - which is why we’ve created a checklist with the most important tax dates for 2021
. It’s also very important to pay your employees their superannuation on time, even if cash flow is an issue and paying superannuation guarantees is the least of your worries. But if you’re not on top of payments and contributions, you risk hefty penalties from the ATO. So, make sure your employees are paid superannuation when they need to be paid. Or seek assistance from a qualified bookkeeper
who can help you.
Keen to learn more about small business tax success? Read the Shoebox guide on how to get this year’s tax return right!
For your questions and concerns regarding your small business tax, our bookkeeping and tax services, don’t hesitate to contact our friendly team at 1300 65 35 83.