Are you paying more tax than you need to? Understanding the tax system can be complex, stressful and time-consuming.
With the July 7 income tax deadline looming many sole traders and small business owners may be experiencing a familiar sense of dread. A few simple errors can result in paying more tax than you need to. Working with a tax agent can not only help you avoid stress but it could potentially save you money! We’re not just here to crunch numbers, there are several ways we can help you throughout the year.
Top 5 Mistakes Businesses Make At Tax Time
#1. Not setting aside enough money for tax
Running a business is a juggle. There’s a lot going on and if you’re a sole trader, most likely, you’re doing it all yourself. Filing taxes as a self-employed person can be different from what you're used to if you've always been on a salary. Unlike employees who have their tax deducted automatically (PAYE), you're responsible for managing your tax payments.
Something to keep in mind if you’re not paying yourself a wage is to put enough money aside to pay taxes. Up to 80 - 90% of businesses fail in the first year because of poor cash flow management, so you should start saving for taxes the day you receive an income.
There are three ways to pay taxes as a self-employed person:
Schedular payments: This is similar to PAYE, where the company you contract for deducts tax directly from your pay. This is less common but can happen with independent contractor work.
End-of-year lump sum: If you don't have schedular payments, you'll need to calculate and pay your tax bill in one go at the end of the tax year. This can be a shock if you haven't set aside money throughout the year.
Instalments (Provisional Tax): This is a way to spread out your tax payments throughout the year.
Here's the important part: Plan ahead and set aside a portion of your income regularly for taxes into a separate savings account. This way you can avoid the significant tax burden at the end of the financial year, preventing the need to use your savings or, worse, face penalties.
How Can A Tax Agent Help?
Deal with a human. No more wading through piles of receipts or searching the IRD website to find the asset depreciation value. A tax agent is a real person who can answer your questions in plain English and explain things in a way that makes sense to you.
Here's a little-known secret! Tax agents can often get an extension to file your return until the following March. This takes the pressure off the July deadline and gives you more time to get your paperwork together.
#2. Forgetting about ACC
Alongside your tax obligations, as a small business owner, you’re responsible for paying your ACC levies. You’ll need to set aside roughly 2 – 4% of your income. The exact amount you owe will depend on your type of work because certain work equates to higher risk.
In New Zealand, everyone who owns a business has to pay ACC levies. These levies cover the cost of injuries if they happen at work, at home, or when you’re out and about. If you’ve always been employed, you’ve likely never had to think about ACC levies as these are automatically taken out of your pay. Ensure peace of mind by proactively putting aside enough money to cover these levies when they’re due.
How Can A Tax Agent Help?
Tax agents are more than just your end-of-financial-year income tax calculator. Tax time might be the most visible time for tax agents, but our expertise goes beyond filing your return. We can advise on ACC, tax implications for major life decisions, help with planning, and even help with PAYE.
#3. Poor record keeping
One of the most common mistakes made by small businesses is not keeping sufficient records. The Inland Revenue requires you to keep records of your income and expenses, GST, PAYE and accounts for 7 years. If you’re audited, IRD will ask to check these records. By not keeping proper records, you could miss out on valuable tax deductions, plus you might face penalties for underpaying your taxes.
How can a tax agent help?
There are lots of apps and accounting software available that make it easy for you to scan receipts and keep a record of your accounts. The best solution is to develop a system for collecting and storing receipts, invoices, and bank statements. I can recommend accounting software that suits your business’s needs.
#4. Not registering for GST
Navigating the world of GST can be tricky, you don’t need to rush to register for GST, but as a small business, as soon as you think you’re going to exceed $60K in a financial year, you need to register for GST. The process to register is simple, and I can help if you need it.
How can a tax agent help?
If you exceed $60K and you haven’t registered for GST, you can incur penalties. I can provide monthly reports and keep track of what is happening with your accounts and cash flow, so you’ll know exactly when your turnover reaches the GST threshold. I can help you set up a system for monthly reporting that gives you a clear picture of your financial health, allowing you to see your profits, manage expenses, and make informed decisions throughout the year.
#5. Not claiming all deductions
Your tax bill is based on your net profit. You can lower your tax bill by claiming valid business expenses, which requires maintaining accurate records. At tax time, your taxable profit is your income minus the deductible expenses — the more you claim, the less tax you’ll owe. Many business-related costs are deductible; if you work from home, you may also be able to claim some household expenses.
The problem arises when a business owner doesn’t know what they’re entitled to claim. I know of one sole trader working part-time as a contractor and, in her first year of paying taxes, didn’t claim a single expense, because she didn’t know she could.
How can a tax agent help?
As a tax agent, I know all the things you can claim for. I can help you gain a deeper understanding of your financial situation and identify areas for improvement to develop strategies to maximise your profits and minimise your tax burden. Remember a tax agent is actually a business expense and is therefore tax deductible, which contributes to a reduction in your overall tax bill.
If you’re feeling stressed about tax time, consider getting in touch. I can save you time, frustration and potentially money. Let me take care of your bookkeeping so you can take care of your business.
