5 Common Tax Mistakes Small Business Owners Make and How to Avoid Them
- Marketing Manager
- Nov 13
- 5 min read
Tax season can be one of the most stressful times of the year for small business owners, freelancers, and contractors. Whether you're managing a team, working solo, or juggling multiple clients, ensuring that your taxes are done correctly can feel like a daunting task. With the ever-changing tax regulations and complexities surrounding business deductions, it’s easy to make mistakes that could cost you.
In this post, we'll explore five common tax mistakes that small business owners, freelancers, and contractors often make, and provide practical tips on how to avoid them.
We'll also discuss how these mistakes could affect your business, and how the new regulations can help you avoid these pitfalls.
1. Not Keeping Track of All Business Expenses
As a small business owner, freelancer, or contractor, you likely have a lot of expenses related to your work. These expenses can be a big part of your tax deductions, so not keeping track of them can lead to missed opportunities for savings.
Mistake:
Many business owners fail to track their expenses properly, either because they don’t realize which expenses are deductible or simply because they don’t have a system in place to keep track of them. This is a common issue, especially for freelancers and contractors who don’t have an accounting team to help them.
How to Avoid It:
Set up a system for tracking expenses as they arise. This can be as simple as using an accounting software like QuickBooks or Xero that allows you to track expenses in real-time.
Keep receipts and records for all business-related purchases. This includes things like office supplies, software subscriptions, client entertainment, and even home office expenses.
Regularly categorize your expenses into relevant tax categories to avoid confusion at the end of the year.
For example, if you work from home, you may be eligible to claim a portion of your home office expenses, such as rent, electricity bills, and internet costs.
Important Tip: Consult your accountant or use software that can help categorize these deductions, so you can be sure you’re claiming all eligible expenses.
2. Failing to Separate Personal and Business Finances
This is a big one. Many freelancers and contractors use personal accounts for business transactions, which can lead to significant problems during tax season.
Mistake:
By mixing your personal and business finances, you could risk overlooking potential deductions or misreporting income. Not to mention, it can make it much harder to understand your business’s financial health, and could raise red flags with the Australian Tax Office (ATO) during an audit.
How to Avoid It:
Open a separate business bank account to keep your business and personal finances distinct.
Use a business credit card for business expenses so that everything is tracked and clearly separated.
Regularly review your financial records and make sure personal expenses are not being incorrectly classified as business expenses.
Separating your finances will not only make tax time less stressful, but it will also help you gain a clearer picture of how your business is performing throughout the year.
Related Reading: Interested in learning more about how new tax regulations affect your business? Be sure to check out our post on 5 Surprising Ways New Tax Regulations Could Impact Your Business.
3. Not Understanding the Tax Obligations of Contractors
Freelancers and contractors often work under different tax rules than full-time employees, and failing to understand these rules can lead to costly mistakes.
Mistake:
One common mistake is not setting aside money for taxes. Since freelancers and contractors typically don’t have taxes withheld from their paychecks, it’s up to them to set aside funds and make their tax payments quarterly.
How to Avoid It:
Set aside 25-30% of your income for taxes (this can vary depending on your income and tax bracket). Use a separate savings account to keep this money aside.
Register for PAYG (Pay As You Go) instalments with the Australian Tax Office (ATO), which will allow you to make regular tax payments instead of one lump sum at the end of the year.
Work with an accountant to help you understand your tax obligations and ensure you’re staying compliant with the rules for contractors.
Pro Tip: You may also be eligible to claim certain deductions that are unique to contractors. Track your working hours, project costs, and home office expenses to ensure you’re maximizing your allowable deductions.
4. Missing Out on Superannuation Contributions
When you’re self-employed, it's easy to overlook your superannuation. However, superannuation is not only an important part of saving for your future, but it’s also a requirement under Australian law for contractors in some cases.
Mistake:
Not paying yourself super can result in missed retirement savings opportunities, and failing to pay superannuation when required can result in penalties.
How to Avoid It:
Understand your superannuation obligations. As a contractor, if you earn over a certain threshold (currently $450 per month), your clients are required to pay super on top of your fees. Make sure you have an agreement in place to receive your superannuation, and ensure it’s being paid.
You should also consider contributing to your own super if your clients aren’t required to make contributions.
Tip: Even if your clients don’t provide super, it’s a smart move to pay yourself voluntary super contributions to secure your financial future.
Related Reading: Want to learn more about superannuation changes that might affect you? Check out our article on Why Contractors Should Care About the New WorkCover Regulations.
5. Ignoring Tax Deadlines and Late Filing
Procrastination can be tempting, but ignoring tax deadlines is one of the biggest tax mistakes you can make as a business owner, freelancer, or contractor.
Mistake:
Missing tax deadlines or filing late can result in penalties, interest charges, and loss of potential deductions. This is especially true for freelancers and contractors who may have more complex filings compared to employees.
How to Avoid It:
Mark your calendar with important tax deadlines, such as quarterly BAS lodgement dates and annual tax filing deadlines.
If you feel overwhelmed, set up a tax filing system or work with a tax professional who can ensure you file on time and avoid costly mistakes.
Consider setting up automatic reminders using accounting software like Xero or QuickBooks, or a task management system to keep track of important dates.
Bonus Tip: File early and you can avoid the last-minute rush. It also gives you time to catch any errors before the deadline.
Wrapping Up: Avoiding Tax Mistakes and Growing Your Business
Avoiding these common tax mistakes is essential for maintaining your business's financial health. By keeping track of all expenses, separating personal and business finances, understanding your tax obligations as a contractor, and being proactive with superannuation and deadlines, you’ll set yourself up for success and peace of mind.
Remember, staying compliant with tax regulations doesn’t just help you avoid penalties—it can also help you save money and optimize your business operations. If you’re unsure about your tax situation, consider consulting with a professional tax advisor who can guide you through the complexities.
Stay proactive, stay organized, and you’ll sail through tax season with ease!
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