No one looks forward to taxing season. However, as a business owner, there’s a new level of complexity added to this already frustrating situation. The good news is, business owners can avoid issues by getting to know some of the most common mistakes made and how to avoid them.
- Not Reporting Income Properly
Getting taxes done right the first time is crucial for a business owner. It can help them avoid costly mistakes and other issues. One of the most common mistakes made is not reporting income properly.
If business owners over- or under-report their income, they are asking for an audit. In the worst-case scenario, an individual may also face charges of fraud.
Unfortunately, mistakes happen. This is especially true if the business owner is working to balance invoices and business payments. Sometimes, the payments may be reported by the payers in one pay period but not recorded by the business until another pay period.
The separate pay periods may overlap tax years. It’s best to maintain business records throughout the year. Also, keep accurate and detailed records of all payments that are made or received.
- Not Separating Expenses
When running a small business, it’s easy to blur the line between personal expenses and business expenses. The IRS doesn’t like blurry lines. They want to see a clear separation of business expenses and personal expenses.
To avoid scrutiny from the IRS, maintain meticulous records of expenses and receipts. Separate everything to avoid confusion.
- Missing Deductions
While no one wants to face an IRS audit due to a careless deduction, business owners don’t need to miss out on what they deserve. There are numerous business deductions available. For example, startup companies may deduct up to $5,000 in initial costs.
The deductions allowed will vary depending on the size and type of business in question. What qualifies as a deduction also varies. It’s best for a business owner to hire a tax professional to help with this.
- Mistakes with Employee’s Work Status
When employees are hired, an entirely new set of tax complications is introduced. It’s one thing to make a mistake with an employee’s payroll, but misclassifying the work status of an employee is something the IRS frowns on.
Be clear about the employee that’s been hired. Are they a W-2 employee or a 1099 contractor? Be able to defend your choice.
- Filing or Paying Taxes Late
When it comes to critical tax mistakes, this is the one that may cost a business owner the most. Even if the business files for an extension, they will face fees and penalties that add up quickly. This isn’t a situation most business owners want to find themselves in.
If a business cannot file their taxes on time, they will also rack up interest and fees. Payment arrangements can help to mitigate these issues. However, a better option is to make estimated quarterly payments ahead of time.
Keeping Taxes Straight
If a business owner wants to remain on a solid financial footing, the best thing they can do is report and file their taxes properly. Doing so will help ensure no problems arise and help the business avoid unwanted attention from the IRS. It’s a good idea to work with a tax professional for help with this, as they can ensure all the mistakes here are avoided.