6 Tax Mistakes Your Business Should Avoid
1. Combining Personal and Business Finances
It’s easy for small business owners to get caught in the trap of combining the two, but when it comes to tax season, you’ll be glad you’ve separated your business accounts from personal. If you’re audited, you’ll need to show proof of business expenses, which will be tricky if you’ve paid with personal accounts.
Separating business and personal finances might involve some work, but the effort will be worth it when filing taxes. Start by opening a separate checking account to pay for business expenses, making it easy to use your bank statements to fill out tax forms. Then, apply for a business credit card to avoid covering costs with your personal credit.
2. Not Classifying Employees Correctly
Determining the difference between contractors and employees will make a big impact on the way you file taxes. As a small business owner, you might hire contractors who handle their own taxes, or you could also have employees who you’ll need to pay employment taxes for.
If you’ve misclassified contractors and employees, you may find yourself dealing with paperwork from months prior. You’ll also have to deal with tax penalties from the IRS. Prevent this from happening by knowing the difference between contractors and employees, and identifying each correctly on tax forms.
3. Inaccurately Recording and Reporting Income
One of the major mistakes a small business owner can make is not keeping accurate records. This is especially true for businesses that deal with cash transactions. Without keeping detailed income records throughout the year, there’s a good chance that the income you claim on your taxes won’t be accurate.
Using accounting software can help to keep information organized, and will make it easier to quickly find what you need when it’s time to prepare your taxes.
4. Missing Deductions or Claiming Too Many Deductions
When it’s time to claim deductions on tax forms, be sure that you’re not missing out on any. Unfortunately, many business owners overlook major deductions that make a huge impact on how much they’ll owe. Some of the areas to consider include mileage, business travel, office supplies, and industry magazine subscriptions.
On the other hand, you’ll want to be sure that you can prove purchases were made for business purposes. The IRS has a good idea of what typical expenses look like, and will flag those that are disproportionate. Follow the guidelines for what you can deduct and limits on how much you can deduct in specific areas to avoid raising concern.
5. Filing or Paying Late
If you don’t file your taxes on time, you’ll face a penalty of 5 percent of the balance due for each month that the balance is left unpaid, up to five months. After filing, if you don’t pay the amount owed on time, you’ll most likely have an added penalty of 0.5 percent to 1 percent of the balance per month.
Making the mistake of both filing and paying late will leave you with a combined penalty. You’ll accrue a penalty of 25 percent of the amount owed for the first five months, and an additional 0.5 percent for every additional month, until you reach 47.5 percent.
The IRS makes it relatively easy for small businesses to apply for an extension. With Form 7004, you’ll receive an automatic extension for filing your taxes. Keep in mind that you’ll still have to pay by the due date. The form can be filed online.
6. Not Getting Help
Business taxes can be complicated, and it might be more work than you can take on alone. Working with a professional can help you ensure that you file correctly, and are declaring deductions and business expenses accurately.
There are many companies and individuals that provide tax assistance to small business owners. Unfortunately, all of these services don’t abide by IRS rules and guidelines. If your tax accountant is encouraging you to hide income, change numbers, or be dishonest about business expenses, they aren’t the right choice. Remember that you’ll be responsible for any inaccurate information, regardless of who helps you prepare and file your taxes.
Do you have more tax advice to share with fellow small business owners? Share your tips in the comments below.
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