Year Round Tax Prep: 10 Misconceptions About Small Business Taxes

Here are 10 misconceptions about business taxes you should avoid.

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6. You can treat your hobby like a business.

This is similar to #5. If you use an incorporated business to do a lot of sightseeing and don’t really conduct business with your company, the IRS may consider it as a hobby, thus disallowing you from writing off expenses that have absolutely nothing to do with any business transactions or activities. Again, just be careful and make sure you are actually at least attempting to turn a profit on your supposed for-profit entity.

7. I can borrow from my employee withholding account.

The penalty of dipping into employee withholding accounts such as Social Security and Medicare can be detrimental. There are very large penalties associated with doing so. Keep your accounts separate and treat employee withholdings as off-limits because they really are.

8. It’s best not to hire and work with family.

Hiring family for tax purposes can be one of the best moves you make in business. Compensation paid to children is tax deductible. So, if your kids are using their salary to pay for things like college tuition, books and other expenses, you just figured out a way to make those expenses tax deductible as well. The IRS also sets aside a certain amount of annual compensation paid to children as completely tax free. Paying your offspring can have significant tax benefits.

9. All bookkeepers are created equal.

As any professional small business bookkeeper will tell you, bookkeeping is not an art, it’s a cumbersome science and the most detail-oriented bookkeeper can often be your best friend. Just think, if your books are prepared properly using today’s advanced accounting software and tools, you’ll be about 95% ready to click submit on your eFile when the April 15th deadline rolls your way.

10. I can pay myself a fat salary.

If you are incorporated, double taxation and unreasonable compensation can cause you to lose out big time when tax season rolls around.

For instance, if you suddenly decide to significantly increase your compensation from one year to the next, you may be required to pay tax as a corporation, then you’ll be required to claim excess as dividend payouts. If it’s a small business this can be especially hurtful because then you will be required to pay taxes on the dividends. This is not the best scenario if you are trying to minimize taxes.


Navigating small business taxes can be rough. Successful entrepreneurs are those who can truly specialize in their field and leave the difficult aspects of their taxes and bookkeeping to knowledgeable professionals. Personal taxes can be easily done with software. For the more complex business taxes, professionals are the best route.

What are some other small business tax tips that entrepreneurs can use all year round? Let me know in the comments section below.

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Photo Credit: Zara

Will Clive is a marketing manager for SmallBusinessTaxes.com. His expertise ranges across all things tax, but he especially loves working with entrepreneurs who are passionate about what they do. He resides in Utah.



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