Entrepreneurs face a lot of risk, and this risk puts them in danger of making big mistakes at tax time. The way your funds are managed is important. Spending a lot on “business expenses for the sake of writing them off” does not always pan out well either, since only 50-percent can actually be deducted for meals and entertainment. Below is a list of some of the worst mistakes entrepreneurs make when it comes tax time. Current and aspiring entrepreneurs should read carefully.
Not Paying into Social Security
Social Security payments are based upon your lifetime earnings. If you choose to take the entrepreneurial route, you still have to pay into Social Security. Not doing so can result in lower payments upon retirement.
Not Creating an IRA
An Investment Retirement Account is important for entrepreneurs. This account effectively creates a “running savings account” of sorts. Traditional IRAs require annual distribution payments or withdrawals once you reach the age of 70 and a half. It is important to take the scheduled withdrawals and not make early withdrawals since these early withdrawals lead to penalties.
The withdrawals can be re-invested, donated or used for whatever purpose you wish, but must be taken. You are penalized if you take early withdrawals and you are penalized if you do not take them on time. Moreover, not reporting the true value of your IRA can result in an audit being issued.
Every penny spent for your business ventures must be accounted for. When it comes to the IRS, you cannot hide anything. Entrepreneurs have the same tax laws to follow as individuals, corporations and small businesses. Make sure that large expenditures are accounted for and are justified to prevent audits from being issued.
Image credit: Brian Wilkins