The Top 5 Tax Mistakes Every Small Business Owner Should Avoid

February 20, 2024
5
minutes to read
by
Ben Winford
Table of Contents

Tax season can be stressful for anyone, but it's especially challenging for small business owners. With so many tax laws and regulations to keep track of, it's easy to make mistakes that can lead to unexpected tax bills and other issues. In this article, we'll explore the common causes of small business tax mistakes and provide tips for avoiding them. We'll also discuss how to forecast your taxes, avoid 'tax bill shock', and secure a loan to pay a tax bill if needed. If you're looking for a reliable tool to help with your small business taxes, we'll explain how Thriday's automated accounting software works. With Thriday, you can streamline your tax planning and forecasting, so you can focus on growing your business.

Common Causes of Small Business Tax Mistakes 

As a small business owner, keeping track of all the necessary paperwork and deadlines associated with taxes can be challenging. However, by failing to keep accurate records and not understanding tax laws and regulations, you could run into issues with the Australian Taxation Office (ATO) that could lead to significant financial consequences. 

One of the most common causes of small business tax mistakes is the lack of accounting and bookkeeping systems. When you don't have a clear picture of your business's finances, it's easy to overlook critical details that could affect your taxes. Additionally, failing to keep accurate records of your expenses, income, and deductions could result in errors on your tax returns and trigger ATO audits. 

Another common cause of tax mistakes is not understanding tax and payroll laws and regulations. Tax laws are complex and can vary depending on your industry, business structure, and location. Failing to keep up with changes to tax laws and regulations could lead to errors in your tax returns and increase the risk of penalties and fines. 

To avoid these small business tax mistakes, it's essential to establish accounting and bookkeeping systems that allow you to keep accurate records and stay on top of tax-related deadlines. Additionally, staying informed about tax law and regulation changes can help you avoid errors and remain compliant. 

 

Top 5 Small Business Tax Mistakes to Avoid 

Now that we've covered some of the common causes of small business tax mistakes, let's dive into the top five mistakes you should avoid: 

  

1. Failing to register for an Australian Business Number (ABN) 

An ABN is essential for running a business in Australia; failing to register for one can lead to issues with the ATO. Besides the tax and legal implications, not having an ABN means you can't register for the Goods and Services Tax (GST), open a bank account or secure a business loan, and there is a risk of penalties and fines for not quoting an ABN on invoices and other business documents. Make sure you register for an ABN as soon as possible. 


If you still need to register for an ABN, Thriday can help. Request for your ABN here

  

2. Misclassifying employees as independent contractors 

Misclassifying your workers can result in costly penalties and fines. In Australia, employees work under a 'contract of service'. In contrast, contractors operate under a 'contract for services', with the critical difference being the level of control the employer has over the work and how it is performed. If you have team members hired as contractors, but they get instructed, trained and guided like an employee, they are likely to be classified incorrectly. Ensure you understand the differences between employees and independent contractors and correctly classify your workers. 


Need help determining whether your workers are classified correctly? Seek advice from the ATO

  

3. Failing to keep accurate records 

Accurate records are essential for preparing your tax returns and avoiding errors. Ensure you track all your income, expenses, and deductions throughout the year. It's also important to keep receipts. Receipts serve as evidence of the expenses; they include the GST and are required for making tax claims. Keeping accurate records throughout the year can help with record-keeping and financial management, providing a clear picture of the business's cash flow and financial transactions. It can assist in resolving any disputes with suppliers or customers. 


Use Thriday's next-gen financial management platform to automate banking, accounting and tax. Join for free

  

4. Forgetting to claim all deductions 

Many deductions are available for small businesses, so keep track of all your eligible deductions and claim them on your tax return. These deductions will reduce the business's taxable income, which can lower the amount of tax owed to the ATO. Deductions are generally claimed in the income year in which they were incurred, and businesses must have appropriate records, such as receipts or invoices, to support their claims. 


Not sure which deductions you're eligible for? Use Thriday's software to automate it for you

  

5. Missing tax deadlines  

Missing tax deadlines can result in penalties and fines, so staying on top of all the necessary deadlines throughout the year is crucial. If you miss a deadline, the ATO may impose penalties and interest charges for late lodgment or payment of taxes, which can increase the amount owed. The ATO may also take legal action against a business for non-compliance with tax laws, which can result in fines, court orders, or even bankruptcy. 

Set reminders for all the necessary tax deadlines or use Thriday's software. 

 

How to Forecast Your Tax 

One of the best ways to avoid issues with small business taxes is to plan and forecast your tax liability. Here are some steps you can take to predict your tax: 

  • Estimate your income: Start by estimating your business's annual income. An estimate will give you a baseline for your tax liability. 
  • Calculate your deductions: Next, calculate your eligible deductions. Subtracting your deductions from your income will give you a more accurate estimate of your taxable income. 
  • Use a tax calculator: To get a more precise estimate of your tax liability, use a tax calculator. This ATO tax calculator is an excellent place to start. 
  • Adjust your withholding: If your estimated tax liability is higher than expected, you may need to adjust your withholding to avoid a large tax bill at the end of the year. 

  

Thriday's tax forecasting software can help you estimate your BAS and tax liability accurately and plan ahead to avoid surprises at tax time. By forecasting your tax liability, you can avoid surprises when it comes time to file your tax return. 

Thriday Tax predictor

 

How to Avoid Large Tax Bills 

If you've underestimated your tax liability or have yet to keep up with your tax payments, you may face a large tax bill or 'tax bill shock'. Here are some steps you can take to avoid a large tax bill: 

  • Pay your taxes on time: The best way to avoid a large tax bill is to make sure you pay your taxes on time. This means staying on top of your estimated tax payments and filing your tax return on time. 
  • Consider a payment plan: If you can't afford to pay your tax bill in full, consider setting up a payment plan with the ATO. This will allow you to pay your tax bill in instalments over time. 
  • Apply for a loan: If you need to pay your tax bill immediately, consider applying for a business loan. Many lenders offer loans specifically for paying taxes. 
  • Adjust your withholding: If you're consistently facing large tax bills, you may need to adjust your withholding to ensure you pay enough in taxes throughout the year. 

  

How to Secure a Loan to Pay a Tax Bill 

If you're facing a large tax bill you can't afford to pay out of pocket, you may need to apply for a loan to cover the expense. Here are some tips for securing a loan to pay your tax bill: 

Check your credit score. 

Lenders will want a good credit score before approving your loan application. Make sure your credit score is in good shape before you apply. 

Prepare your financial documents. 

Lenders will want to see your financial statements, tax returns, and other relevant documents when you apply for a loan. Make sure you have these documents ready to go.  

Shop around for lenders. 

Don't just apply with the first lender you find. Compare loan terms and interest rates to find the best deal. 

Consider a secured loan. 

If you have assets you can use as collateral, such as property or equipment, you may be able to secure a lower interest rate on a secured loan. 

  

Tax Return Processing Times 

Once you've filed your tax return, you may wonder how long it will take for the ATO to process it and issue your refund (if applicable). Here are some things to keep in mind regarding tax return processing times: 

  • E-filing is faster: If you file your tax return electronically, it will generally be processed faster than if you file a paper return. This is because e-filing is automated and eliminates the need for manual data entry. 
  • Refunds may take longer: If you're expecting a refund, remember that it may take longer to process than if you owe taxes. The ATO may need to verify certain information before issuing your refund. 
  • Timing matters: The timing of your tax return submission can also impact processing times. For example, filing your return closer to the deadline may result in longer processing times due to high volume. 
  • Keep track of your refund: You can check the status of your refund using the ATO's online tools. Make sure to keep track of your refund and follow up if it's taking longer than expected. 

With Thriday's tax management software, you can lodge your BAS returns and track your refund status online. Join for free today to simplify the tax return process. 

Thriday's tax software solutions

  

Avoiding Small Business Tax Mistakes 

As a small business owner, staying on top of your tax obligations is vital to avoid costly mistakes and potential legal issues. By avoiding the common small business tax mistakes discussed in this article, you can keep your finances in order and reduce the risk of large tax bills or other tax issues. 

To recap, the top 5 small business tax mistakes to avoid are: 

  1. Failing to register for an Australian Business Number (ABN)
  2. Misclassifying employees as independent contractors 
  3. Failing to keep accurate records 
  4. Forgetting to claim all deductions 
  5. Missing tax deadlines. 

Don't let small business tax mistakes prevent you from achieving your business goals. Automated accounting and tax management software, like Thriday, can help you stay on track with your bookkeeping, accounting, and tax obligations. With features like tax forecasts, deadline reminders, receipt scanning and online BAS lodgment, you can avoid the common pitfalls and comply with Australian tax laws. 

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360 AFSL 241167 (Regional Australia Bank). Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you. Team Thrive No 2 Pty Ltd ABN 26 677 263 606 (Thriday Accounting) is a Registered Tax Agent (No.26262416).

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