There are more than 627,000 small businesses that get their start each year. Though getting those companies up and running is challenging, it’s not the hardest thing most business owners face. Instead, most business owners find filing taxes for their company to be the most intimidating and difficult part of owning a company.
If you’re one of them, you’re likely worried about making mistakes when the time comes to file taxes at the end of the year. Luckily, there’s always something you can do to reduce your risk of filing taxes incorrectly.
Familiarize yourself with these common tax mistakes and you’ll be able to avoid making them when you file.
1. Not Maintaining Clear Records
As a business owner, it’s up to you to maintain records of everything your business does throughout the year. If you’re not keeping clear records of your profits, losses, expenses, and other incidentals, you won’t know how your business is really doing.
If you’re not already, start keeping track of everything that impacts your company’s bottom line. Maintain detailed payroll records for every employee and independent contractor you work with. If you’re not comfortable hiring a payroll specialist, use a pay stub creator to generate the necessary paperwork and documents.
You should also maintain copies of every bill or receipt you receive. These can help you when it comes to lowering your taxes owed at the end of the year. Remember, you’re entitled to take certain deductions for your business, and the more you can claim, the less you’ll owe the IRS.
2. Forgetting to Make Quarterly Payments
When you’re someone else’s employee, the only thing you have to worry about is not filing taxes late. Your employer automatically deducts tax withholdings from your paycheck every pay period. This helps cover what you owe throughout the year.
As a business owner, no one is there to do this for you. You need to get in the habit of making estimated tax payments every quarter, like clockwork. If you forget, you could be in serious trouble come tax time.
If you’re not sure where to start, make a note of the quarterly tax payment deadlines and mark them on your calendar. Make sure you send the full amount in by those dates and you’ll be in good shape.
3. Keeping Personal and Business Finances Together
During the first few years of running your business, it’s likely that your expenses and profits will be on the low side. This makes it tempting to combine your business and personal expenses for simplicity’s sake. After all, the fewer accounts you need to manage, the less complicated your finances seem.
Unfortunately, combining your personal and business expenses is a great way to make your taxes more complicated in the long-run. You won’t be able to prove which transactions were for your business and which were for yourself.
Instead, try to separate your personal and business finances as soon as you can. Open a dedicated business checking account and credit card to make tracking your expenses easier. If you’re not sure where to start, talk to your local bank and get their advice.
4. Ignoring Certain Deductions
One of the most common tax mistakes business owners make is not maximizing their deductions at tax time. As a business owner, you’re entitled to deduct certain expenses, losses, and costs from the amount of taxes you owe.
Depending on your situation, this could save you hundreds of dollars on your tax bill.
Keep in mind that it’s up to you to prove that you qualify for each deduction you’re claiming. This means you’ll need to rely on your business’s records, receipts, and documentation to prove your expenses to the IRS.
If you can’t back a deduction up with the necessary documentation, you won’t be able to claim it.
5. Not Issuing Employees Proper Tax Documentation
Payroll taxes are expensive and time-consuming to deal with. However, they’re also a key part of running your business.
If you don’t issue your employees the necessary documentation, they won’t be able to file their taxes accurately. Worse, you could end up facing fines and citations from the IRS.
Get in the habit of sending out W-2s for your full and part-time employees each January. If you hire independent contractors, make sure you provide them with a 1099-MISC form for all work completed during the tax year.
6. Trying to File Taxes on Your Own
Hiring an accountant does cost you money. This makes it tempting to try to file taxes on your own.
While it’s possible to file taxes on your own, it’s not always in your best interest. In fact, it might end up costing you more in the long run than hiring an accountant.
Instead, consider hiring an accountant to help you make sure everything gets filed accurately. They understand the ins and outs of the tax code and will make sure you get the most deductions possible, saving you hundreds on your tax liability every year.
Even better, they’ll reduce the risk of errors on your taxes, sparing you the frustration of dealing with audits.
7. Not Reporting Your Full Income
The more money you earn each year, the more money you’ll owe the IRS. This makes it tempting to not report everything you earned over the course of the year.
Unfortunately, not reporting all income earned can get you in serious trouble. Not only will you have to deal with audits, but you’ll end up getting fined by the IRS.
Stay on top of things and report income from every source you have. This includes your business, investments, side gigs, and even gambling earnings. If you get paid in cash under the table, you’ll need to report those earnings, too.
Avoid These Common Tax Mistakes
No one enjoys filing and paying taxes, but it’s a necessary part of doing business. Keep these common tax mistakes in mind and do what you can to avoid them each year.
The fewer mistakes you make on your taxes, the better off your business and your bottom line will be.
Looking for more helpful tips and tricks to streamline your business and improve your profits? Check out our latest posts.
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