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Common Mistakes Small Business Owners Make on Their Taxes
As a small business owner, your attention is pulled in dozens of directions - marketing, hiring, customer service, daily operations - it's easy to let tax matters fall to the wayside. However, it's tax season once again, so it's time to shift your focus to this important, yet possibly unpleasant, matter. Before you dive in, our team of small business accountants in Raleigh are sharing the common mistakes small business owners make on their taxes so you can avoid them. Doing this will reduce your payment and your risk of an audit.
Common Tax Reporting Mistakes
Reporting accurate, up-to-date information in a timely manner is necessary to avoid having to pay late fees and fines as well as raising suspicion with the IRS and possibly getting audited. The most common tax reporting mistakes we see are:
If you work with independent contractors, make sure they fill out a Form W-9 upon beginning to work with you. If you pay them more than $600 in a fiscal year, you need to accurately report their income on a Form 1099-MISC while providing the contractor with their own copy of the document. Many small business owners will classify contractors as employees on their taxes, but that's actually costing more money as well as inaccurate.
Over-Reporting or Under-Reporting Income
One of the ways small business owners over-report income is by including sales tax in their income reporting. Sales tax should not be included, so it's important to subtract any that was paid during the year from your total income.
Under-reporting is also a common and costly mistake. For example, if you sold business equipment you no longer need, like furniture or a computer, you do need to include that as income on your taxes.
Not Filing On Time
If you're a small business owner operating as a sole proprietor, partner, LLC, or S-corporation shareholder, you should be paying quarterly estimated taxes, especially if you expect to owe over $1,000 when it's time to file your return. Many business owners don't do this and end up getting hit with a massive tax debt that is difficult to pay off.
Also, paying on time is necessary to avoid late fees and fines. Follow the tax deadline schedule to avoid this.
Tax Deduction Mistakes for Small Businesses
Tax deductions make it so much easier for small businesses to thrive, but the IRS doesn't always make it clear what you can deduct and the guidelines and limitations surrounding deductions.
Commonly Missed Deductions for Small Businesses
You can write off the business costs for the following items:
- Home office - it's important to read the IRS guidelines for a home office deduction to make sure yours is eligible.
- Accounting and bookkeeping fees or software cost
- Tax preparation expenses
- Business use of vehicles, such as using your car to deliver products or non-commute related travel
- Insurance, including both health insurance for yourself and your employees
- Travel expenses
It's important to note that if you plan on deducting meals, say if you take a client out to dinner or pay for lunch for your employees, only 50 percent of meals can be claimed.
Inaccurate or Disorganized Records
The accuracy of your tax reporting relies on the accuracy of your bookkeeping. If you aren't keeping close records of expenses, including a travel log for your mileage, saving receipts, and tracking any income, payroll, and sales tax, you will either be missing out on deductions or not paying nearly enough. Either scenario can be financially disastrous for your small business. If you are unable to keep up with your financial records, it's a good idea to consider professional bookkeeping.
Separating Personal Expenses and Business Expenses
If you're operating a sole proprietorship or an LLC, your business income will pass through to your personal income and you'll report all of it on your personal income tax return. Doing this is convenient, but again, this is where keeping organized records and having separate bank accounts is important. This way you'll have a clean separation of expenses and won't inadvertently miss out on deductions or deduct too much.
Not Using a Small Business Accountant
While tax software may make it seem easy for a small business owner to do their own taxes, many business owners who do this end up missing out on major deductions or misfile their taxes. Working with a professional accountant who is experienced in assisting small businesses means that your tax return will be accurate, timely, and more balanced in your favor.
Contact Our Small Business Accountants in Raleigh
With April 15th just around the corner, reach out to our team today to help with your small business tax preparation. Our experienced CPAs will minimize your tax burden while ensuring your return is accurate, on time, and filed properly with the right forms.
Contact our office by completing the online form or by calling 919-420-0092.
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