Tax time is hard enough without getting entangled with the IRS. When you run your own business, you have to deal with a stack of forms relating to deductions, expenses, income, payroll and more. All the information on those forms must be right the first time to avoid extra hassle. When preparing your returns, beware of these common mistakes.
Mistake N°1 : Not Separating Expenses
Lumping personal and business expenses together in an attempt to simplify your return is a surefire way to draw attention from the IRS.
Household purchases, your pet’s medical bills and your kids’ cell phone plans are all personal items that shouldn’t appear on your business taxes. Use dedicated accounts and credit cards to keep these payments separate. Modern accounting technology makes this easier with mobile applications that allow you to record and classify all expenses as they’re incurred.
Implementing small but easy to manage routines, such as taking photos of receipts as expenses are incurred and adding notations in a simple expense reporting application will save hours of end-of-year time when you pull together all your qualified expenses as well.
Mistake N°2 : Neglecting Qualifying Deductions
Business owners are often unaware that they can take deductions for dedicated home office space, business use of their vehicles, office supplies and other expenses related to running their companies. It takes a little research to find out exactly what you can deduct, but that time can pay off in a big way. Keep detailed records throughout the year so that you can claim the maximum amount of deductions.
Work with a professional tax advisor or CPA to get a clear understanding of what deductions are available and how the IRS will expect them to be documented. For example, business use of a vehicle can be documented via straight standard mileage or actual expenses. Determining which is more suitable and which documents you need to keep on hand may have a significant impact on the size of your allowed deduction.
Mistake N°3 : Ignoring Sales Taxes
If your business sells anything that you’re required to collect tax on, you must file a form for sales taxes in addition to the rest of your tax paperwork. Check with your state to find out what registration process you have to go through to begin collecting sales tax, and keep track of all the tax your customers pay throughout the year.
Mistake N°4 : Missing the Deadline
Penalties for filing or paying late add up fast, incurring extra expenses that you don’t need on top of your business taxes. A late filing penalty can be as much as 25 percent, and it can cost you 47.5 percent if you also pay late. Deadlines have a way of breezing by if you don’t block out enough time in advance to complete your taxes, especially if you’re required to file quarterly estimated taxes.
Mistake N°5 : Classifying Employees Incorrectly
There’s a distinct difference between an employee and an independent contractor, and you can get into a lot of trouble with your taxes if you don’t make the right distinctions. The IRS provides guidelines to make this process easier. Once you have everyone listed in the correct categories, make sure that employees get their W-2 forms and contractors making more than $600 for their services receive 1099-MISC forms.
Mistake N°6 : Not Checking Your Return
Glaring inaccuracies are a red flag to the IRS. If you have reliable controller services, you should have good enough records to avoid these problems. However, since tax time can be so confusing and hectic, it’s tempting to simply sign your returns and send them off as soon as they’re complete. The errors that can result from doing this may saddle you with a penalty of as much as 20 percent. Even if you use a tax program, double-check all your forms to make sure that everything you submit is correct. Hiring professional accounting services or bookkeeping services to handle your business taxes is a smart way to avoid these errors.
A small business accounting expert can save you the headache of lost time, money and income that arises when tax troubles pop up. By filing accurate, on-time returns each year, you show that you’re trustworthy and maintain a reputation that keeps you in the clear with the IRS. Keep in mind that not all accounting and bookkeeping professionals are created equal so take time to vet each one and check their reputations. Your financial future depends on it.