Common Tax Mistakes Longmont Business Owners Make (And How to Avoid Them)

Running a business in Longmont is a rewarding venture, but when tax season rolls around, it can feel like you’re walking through a minefield. Whether you’re just starting out or have been in business for years, some tax mistakes are easy to make, but they can be costly. The good news? Most of these mistakes are avoidable with a bit of foresight and preparation. In this article, we’ll walk through some of the most common tax mistakes Longmont business owners make and share tips on how to avoid them. Let’s dive in!

1. Not Keeping Accurate Records

It’s easy to think that keeping your receipts and invoices organized can wait until tax time, but trust us. This is one of the biggest mistakes you can make.

Why it’s a problem:
Failing to maintain clear, organized records throughout the year can lead to missed deductions, reporting errors, and, in the worst-case scenario, an IRS audit. It’s a lot harder to reconstruct your business finances from scratch after the fact than it is to stay on top of things as you go.

How to avoid it:
Set up a simple system for tracking your business expenses. Invest in accounting software like QuickBooks or Xero, or if you prefer the old-school way, create an organized filing system for receipts and records. By getting into the habit of updating your records regularly, you’ll save yourself tons of time and stress when tax season comes around. Plus, it’ll give you a clearer picture of your business’s financial health throughout the year.

2. Misclassifying Employees vs. Independent Contractors

This is a subtle but significant mistake. It’s easy to assume that someone working for you on a freelance basis isn’t technically an employee, but the IRS has strict guidelines on worker classification, and misclassifying them can lead to serious consequences.

Why it’s a problem:
Classifying a worker incorrectly can result in penalties, back taxes, and legal headaches down the road. If the IRS determines that someone should have been treated as an employee, they may require you to pay payroll taxes that you haven’t been withholding.

How to avoid it:
Understand the key differences between employees and independent contractors. Employees typically have more control over how and when they do their work, while independent contractors maintain more autonomy. When in doubt, consult with a tax advisor who can help you classify workers correctly based on IRS guidelines. It might seem like a small detail, but getting it wrong can be a costly mistake.

3. Ignoring Local and State Tax Requirements

Many Longmont business owners focus heavily on federal taxes and overlook their local and state obligations. But Colorado has its own tax rules, and Longmont has specific regulations you need to be aware of to stay in compliance.

Why it’s a problem:
Ignoring state and local tax laws can lead to penalties, fines, and even an inability to operate your business. Sales tax, business license fees, and specific industry taxes vary by location, and missing these obligations can be detrimental to your business.

How to avoid it:
Stay informed about both state and local tax codes. Colorado’s Department of Revenue and the City of Longmont both have resources available online to help you understand what taxes you’re responsible for. For example, sales tax in Longmont differs slightly from other parts of Colorado, so understanding the specifics of your local tax requirements is crucial. If you’re unsure, don’t hesitate to reach out to Longmont CPAs, who can keep you up to date with any changes in tax laws.

4. Failing to Take Advantage of Deductions and Credits

There are many tax breaks available to business owners, but unfortunately, many miss out on them simply because they don’t know they exist or they don’t track their expenses carefully.

Why it’s a problem:
You could be paying much more in taxes than you need to if you’re overlooking valuable deductions and credits. For instance, expenses like home office space, business mileage, and certain equipment purchases could save you a significant amount.

How to avoid it:
Get familiar with the deductions available to you as a business owner in Longmont. Create a dedicated system for tracking all business-related expenses—no matter how small they seem.

5. Not Planning for Estimated Tax Payments

As a business owner, you’re responsible for paying your taxes throughout the year, not just at the end. If you’re self-employed or your business isn’t a corporation, you’ll likely need to make estimated tax payments. Failing to plan for these payments can lead to a hefty tax bill with penalties attached.

Why it’s a problem:
Not making estimated tax payments can result in late-payment penalties or a large, unexpected bill that you might struggle to pay all at once.

How to avoid it:
A good rule of thumb is to set aside 25-30% of your business income for taxes each month. You don’t need to pay the full amount right away, but setting money aside will help cushion the blow when your estimated payments are due.

6. Overlooking Tax Deadlines

Missed deadlines aren’t just an inconvenience—they can be costly. The IRS charges penalties for late filings, and those penalties can quickly add up. Plus, if you miss a deadline and don’t file an extension, you may lose out on potential deductions and credits you would have been eligible for had you filed on time.

Why it’s a problem:
Missing deadlines could result in hefty fines and interest charges. In addition, waiting until the last minute to file your taxes doesn’t give you time to plan for any potential mistakes or issues that might arise.

How to avoid it:
Stay ahead of the game by marking all relevant tax deadlines in your calendar. If you know you won’t be able to file on time, don’t wait until the last minute—file for an extension. This gives you more time to gather everything you need without rushing and risking mistakes. It’s better to file late with an extension than to file late without one.

7. Mixing Personal and Business Finances

This is one of those mistakes that seem harmless, but it’s actually a major pitfall for many small business owners. Mixing personal and business finances makes it difficult to track business expenses, and it can also raise red flags with the IRS if they decide to audit you.

Why it’s a problem:
When you don’t separate your business and personal finances, you risk complicating your tax filings. For example, it may be harder to prove which expenses are legitimate business expenses, leading to missed deductions and potentially triggering an audit.

How to avoid it:
Open a dedicated business bank account and credit card. This makes it much easier to keep track of your business’s finances and helps you stay organized when tax time comes around. Plus, it just simplifies life in general, giving you a clearer picture of how your business is performing financially.

8. Not Seeking Professional Help When Needed

Let’s face it: taxes can be complicated. Trying to navigate the maze of tax codes on your own can lead to costly errors, missed opportunities, and unnecessary stress.

Why it’s a problem:
Many business owners don’t realize that a small mistake on their tax filings can lead to big problems later on. The cost of hiring a tax professional is often far less than the potential cost of making a mistake.

How to avoid it:
If you’re unsure about your taxes or if your business situation has changed recently (new employees, significant growth, etc.), it’s a good idea to consult with a local tax expert. They can help you optimize your deductions, avoid mistakes, and ensure you’re in full compliance with the IRS. Think of it as an investment in peace of mind and a smoother business operation.

Conclusion

Being a business owner in Longmont is full of challenges, but taxes don’t have to be one of them. By staying organized, understanding your responsibilities, and seeking help when needed, you can avoid these common tax mistakes and save yourself a lot of time, money, and stress. If you’re unsure about any of these areas, don’t hesitate to reach out to a professional who can guide you in the right direction. After all, taking a proactive approach to your business’s finances today can help you sleep easier tomorrow.