5 Common Tax Mistakes All Small Businesses Should Avoid
Tax season is the collective groan heard around the world. We get it. No one enjoys filing their taxes, even when they turn preparation over to a skilled professional. If you’re doing your taxes right, managing your small business taxes should be a year-round process.
Keeping up to date in real-time makes the effort come tax season exponentially easier. But if you’re not staying on top of things, you could make these five common tax mistakes for small businesses.
1. Incorrectly reporting income
If you over-report or under-report your income, in the best-case scenario you’re asking for an audit. In the worst-case scenario, you may face fraud charges. Of course, we’d never suggest a fine, upstanding citizen such as you would deliberately under-report your income.
But mistakes can happen, especially if you’re balancing invoices and business payments. Sometimes payments may be reported by your payers in one pay period. You may not record them until another pay period, though. That separate pay period may overlap tax years.
The IRS will compare your reported income versus any payments reported made to you. If they don’t match up, there may be an agent at your door asking to examine your financial records. Luckily, if you’ve made a mistake, you can clear up discrepancies by submitting corrected forms.
The same can be said if you over-report your income. The occasional error is inevitable. But you can prevent future mistakes by keeping accurate reports.
Maintain your reports year-round. Always update your financial reports and any associated tax documents immediately. Keep detailed, accurate records of all payments sent and received.
2. Not separating your expenses
When you run a small business, it can be easy to blur the line between business and pleasure. Unfortunately, the IRS is not fond of blurry lines. They expect a clear demarcation between your personal expenses and your business expenses.
If you take your car out to run errands, you can deduct mileage for a drive to the post office to ship customer packages. That side trip to the pet store for your cat’s hot pink claw covers, though? The odometer stops ticking the moment you leave the post office.
Any side trips and extra mileage do not count for your small business taxes. One inaccurate expense deduction can draw your taxes into question. Don’t blur the lines between business and personal.
To avoid IRS scrutiny, keep meticulous records of expenses and receipts. Separate everything firmly, with no mixing or confusion.
3. Missing out on deductions
Another common mistake you can make is skipping out on deductions. Hey, we get that you’re afraid of bringing down the wrath of the IRS. No one wants an audit for one careless deduction. That’s no reason to miss out on deductions you should take.
You have several allowable deductions, whether it’s a home office deduction or daily printing expenses. If you’re a fledgling business, you may be able to deduct up to $5,000 in startup costs. The amount you can deduct can depend on the type and size of your business.
What qualifies as a deduction can also vary, such as medical reimbursement and insurance costs. Your best bet is to hire the right tax professional. A qualified tax professional can walk you through your expenses to determine what is or isn’t eligible.
4. Making mistakes with your employee’s work status
Hiring employees places you in an entirely new bracket of tax complications. It’s one thing if you make a mistake calculating an employee’s payroll and correct it the next week. When you make a mistake calculating your IRS payroll deductions, consequences can be far worse.
What you need is a clear grasp of employee and payroll taxes. Every figure needs to be exact when it comes to reporting wages paid to your employees.
You also need to be clear on the type of employee you’ve hired. Are you working with 1099 contractors or W-2 employees?
Believe it or not, it’s easy to mistake one for the other. Check IRS statutes regarding employees and payroll before you prepare your tax forms.
5. Filing and paying taxes late
Of all the critical tax mistakes to avoid, this one could actually cost you the most. If you file your taxes late—even if you file for an extension—you face penalties and fees that can stack up startlingly fast.
If you’re unable to pay at tax time, you can also rack up fees and interest. These will cost you significantly in the long run.
A payment arrangement can help mitigate this problem. However, you’re better off making quarterly estimated payments in advance. With quarterly estimated payments, you may even end up receiving a refund.
In the end, managing your business taxes is all about accuracy and accountability. As long as you strive to be open and transparent while maintaining excellent records, you can avoid many of the pitfalls that befall other small business owners.
The Growth Center does not constitute professional tax or financial advice. You should contact your own tax or financial professional to discuss your situation.