What Small Business Owners Get Wrong About Taxes

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Taxes are often a source of stress for small business owners, but they can become much more stressful when costly mistakes are made. Part of being a savvy business owner is preventing mistakes like this from happening before you file your tax returns. It’s worth taking the time to examine some of the things small business owners most frequently get wrong about their taxes, and their potential consequences, so you can be ready this tax season to spot any mistakes that may make a dent in your returns. Follow along to see the most common mistakes that business owners make about their taxes, and what you can do to avoid them.

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Mistake: Filing and Paying Taxes Late

Failure to file and pay taxes on time is all too common, and the consequences can be catastrophic for a small business. It is crucial to keep track of when taxes are due, and to ensure enough money has been set aside to pay them on time. IRS assesses monthly penalties when taxes are not paid on time or not paid in full, which can cut into your bottom line.



Solution: Take Action

If you know you will not be able to file your taxes on time, request a filing extension. If you do not have enough cash on hand to pay a tax bill on time, do not risk the penalties that come from filing late. These penalties can accrue quickly and compound the problem. Pay what you can and arrange to pay the rest in installments. If you miss the deadline, file as soon as possible to avoid additional penalties. Yours is not the first business to experience this situation, and the IRS has helpful information about payment plans and installment agreements on its website.

Mistake: Neglecting Quarterly Estimated Tax Payments

Many businesses — including some self-employed individuals — are required to pay quarterly estimated tax payments. However, many business owners do not realize these payments are mandatory. Failure to pay the correct amount on time may result in penalties, so it is important to know what you owe, and when.

Solution: Know What You Owe

A little research should reveal whether you must pay quarterly estimated tax payments. According to the IRS website’s Estimated Taxes page, “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.” In addition, “Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.” If you still are unsure whether this applies to you, it may be worthwhile to consult a tax professional who can review your situation and recommend your best course of action.

Mistake: Forgetting Taxes Beyond IRS

Most people understandably equate taxes with IRS, but IRS is not the only entity to which you may owe tax. Other obligations may include state and local taxes, payroll, property, sales tax, excise taxes, self-employment taxes, and more.

Solution: Understand Your Obligations

If you are uncertain which of these taxes apply to your small business, consulting a tax professional may be the best method to be sure you are not missing anything and potentially accruing penalties without your knowledge.

Mistake: Wrongly Classifying Employees as Independent Contractors

Do you know the difference between an independent contractor and an employee? Many workers are mistakenly classified as independent contractors when they actually fit the legal criteria for being employees. This misclassification may trigger an audit with potential financial consequences. As the IRS website states, “If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker.” It is important to classify workers correctly. If workers believe they have been improperly classified, they can report it by filing Form 8919 with IRS.

Solution: Learn the Difference Between Employees and Independent Contractors

The main criteria that differentiates an employee and an independent contractor involves the degree of control the employer has over the worker relative to the independence maintained by the worker. If you discover you have misclassified an employee, the IRS offers the Voluntary Classification Settlement Program (VCSP) to help employers reclassify employees.

Mistake: Failure to Maintain Accurate Records

Maintaining accurate records is the key to filing your taxes correctly. Track your income and expenses throughout the year, retain your receipts, invoices, and other paperwork. Keep detailed notes so you will have a complete record and the paper trail to prove each item is valid in case of an audit. It is much easier to keep accurate records if you update them consistently over time. It is easy to forget details and misplace receipts if you let too much time lapse, and preparing your taxes will be much easier if you don’t have to figure out an entire year’s income and deductions all at once.

Solution: Items to Remember

You may be eligible for a variety of deductions, including startup costs for your business, carryovers from previous tax years, health insurance, business-related travel and meals, out-of-pocket expenses, and many more. The home office deduction is frequently overlooked and often misunderstood, but the IRS website details how to qualify. Keep in mind, it is important not to take excessive deductions. Keep your personal and business finances separate; do not try to report personal expenses as business deductions. If you are audited and cannot prove that the deductions you reported truly were business expenses, the deduction will be disallowed and you potentially could be charged with tax fraud. It is not worth the risk. If you have questions about whether certain expenses are deductible, consult a tax professional.

Mistake: Hiring an Unprofessional Tax Professional

This last pitfall may seem obvious, but it is important to note. If you hire a tax preparer who encourages you to make deductions you know you don’t qualify for, or suggests that you neglect to report all of your income, you are putting your business at risk. Any tax preparer who is willing to risk their own business and yours by cutting corners may also miss legitimate deductions and other details that can cost you money. More importantly, that tax preparer may be caught by IRS when another client’s taxes are audited, which likely would trigger audits of all the preparer’s clients, including you.

Solution: Minimize Your Audit Risk

The best way to avoid an audit is to be certain your taxes have been prepared accurately and thoroughly. Some small business owners prepare their own taxes, but may consult a tax professional with various questions. Others prefer to engage the expertise of a reputable tax professional to handle their tax preparation. Choose the option that best suits your needs so you can get back to running your business.

Do you have experience with small business tax preparation pitfalls like these? Tell us about it in the comments!

The post What Small Business Owners Get Wrong About Taxes appeared first on Home Business Magazine.

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