Curt Mastio
By Curt Mastio on July 09, 2024

Startup Tax Problems: 8 Common Mistakes

Startup tax mistakes waste time and cost money. Plus, taxes are a complex topic that many, outside of industry professionals and tax specialists, struggle to understand. As a result, many startup founders choose to ignore taxes altogether, not wanting to slow down or spend valuable resources on it.

They assume their energy would be better spent on operational topics. But many founders and business owners alike make the same couple of mistakes when it comes to taxes.

Here are 8 common tax mistakes founders make which put their businesses in jeopardy.

8 Common Startup Tax Mistakes

1. Not Paying Quarterly Taxes

Some early-stage founders get into trouble with the IRS by not making quarterly tax payments. But the laws are clear. After being in business for more than one year, most businesses are required to make quarterly tax filings and payments. And as with most legal matters, ignorance of the law does not exempt you from following it.

This issue can be avoided by consistently keeping track of your expected taxes and making regular quarterly payments. Even if a business isn’t yet required to file quarterly, it’s not a bad idea to start out by building the habit of making quarterly payments. Or at the very least, set the money aside so that it’s available.

Furthermore, making quarterly payments helps you avoid the major shock that comes from having to pay a massive annual sum all at once.

Using an accounting service is a great way to keep those dates in mind. Let them help you know what’s needed and when.

2. Not Sending 1099s

Any contractor or freelancer who you’ve worked with throughout the year, and paid over $600, needs to receive a 1099 from your company. For every 1099 you’ve forgotten to send or filed late, you’ll be fined.

Plus, not sending 1099s on time inconveniences your partners and contractors by potentially delaying their tax filings.

Fortunately, this mistake can be easily avoided. Using a payroll app (like Gusto) and engaging an accounting service that specializes in startup payroll will help you make sure to get those 1099s out on time (or automatically).

3. Not Tracking Expenses

Fast-moving startups sometimes find it difficult to keep track of receipts and expenses. Then, when tax time comes around, the founders find themselves scrambling to assemble a year’s worth of receipts and invoices.

From the very beginning of the business, you’re able to deduct “ordinary and necessary” business expenses. These expenses could come from miles driven to meet with your startup accountant, office supplies or entry fees to participate in a trade show.

But of course, if you can’t document it, you can’t claim it. You need to be able to prove that you incurred the expenses in the proper time frame. Use a good budget and regularly check on your expenses.

There are a variety of apps and services on the market to help with expense tracking. Additionally, most payments and banking are now also done electronically. So there’s no real excuse for not linking your banking and credit cards to your business’s accounting software. This makes expense tracking effortless.

4. Not Taking Advantages of Available Tax Credits

Credits like the R&D tax credit are great for startups if you qualify. But without researching what’s available, you won’t know.

Look at common startup credits and deductions in order to avoid missed opportunities. An experienced startup accountant may also be able to provide assistance with identifying potential subsidies.

5. Inadequate Business Entity Structure

The various business entity structures (LLC, C-Corp, S-Corp) all have their own specific tax implications. Matching your entity structure to your business is critical for ensuring you’re not overburdening your business (or yourself) with taxes or paperwork.

If you suspect your structure doesn’t fit anymore, the decision to switch shouldn’t be made lightly. While it’s possible to restructure, you should know in advance what effort and expenses you’re incurring if you decide to go that route.

Avoid this pitfall by researching and discussing with an accounting professional experienced with startups. Have them outline and explain the pros and cons of the different structures and help you select one that fits for you.

6. Not Writing Off Certain Business Expenses

For example, insurance is an essential expense for all businesses. Most startups also need some form of business liability insurance as well. In some cases, it may even be legally required.

Insurance helps to protect the business, its owners and employees from catastrophic loss or crippling lawsuits. Insurance products like:

  1. Worker’s compensation
  2. General Liability
  3. Commercial Property Insurance

But many startup teams don’t realize that as long as the insurances are considered necessary for the business, they’re tax-deductible.

Using an accounting service that specializes in startups can help you catch this sort of deduction. Otherwise, you’re leaving money on the table.

7. Mixing Personal and Business Finances

In the beginning, it can be a real challenge to keep business and personal finances separate. Early “garage and basement” startups especially tend to have personal accounts mixed with business. LLC pass-through income can also make this a real hassle for growing businesses.

It’s no wonder that it can be hard to keep them separated. Founders are often spending massive amounts of time, energy and personal funds to push the business forward.

To avoid this tax problem, either don’t mix personal and business finance at all or separate the two as soon as possible.

8. Not Using a Startup Accounting Service

An accounting service focused mainly on startups and early-stage businesses knows what you’re going through and what to look out for. You’ve got enough things to focus on, learning the ins and outs of startup tax best practices doesn’t need to be one of them.

At Founder’s CPA, we can help you avoid some of the most common tax mistakes that founders make. Let us focus on what we do best – maximizing your deductions and helping you structure your business properly – so that you can focus on building a solid business. This way, you make sure that when it comes to taxes, your bases are covered.

Published by Curt Mastio July 9, 2024
Curt Mastio