If you are a small business owner, it’s important to understand the small business tax preparation mistakes to avoid which could otherwise trigger overpaying taxes, errors that might cause an IRS audit, and financial penalties.
Here are 10 frequent tax preparation mistakes that you should avoid as owner of small businesses:
- Structuring Your Business Incorrectly
How a business is structured can have a huge impact on how they are taxed. If you structure your business as a C-Corp, you are taxed twice. If you go for a sole proprietorship but don’t know how to account for certain items such as self-employment taxes, it can create problems later on. In general, an S-Corp or an LLC may be the best alternative.
- Improperly Classifying an Employee as an Independent Contractor
While it may be tempting to misclassify an employee as an independent contractor due to cost savings, it would not be good for your business. There are strict rules for proper classification of an employee and steep penalties for failure to apply the law correctly. Additionally, if you misclassify your independent contractors as employees, you may end up paying higher taxes.
- Not Making Yourself an Employee of the Business Entity
Even if you are the owner of your business you should still make yourself an employee of the business entity with a reasonable salary. Failing to do so may result in additional social security taxes which are often collected in the form of the self-employment tax. When in doubt, consult a CPA or Enrolled Agent about this.
- Mixing Personal & Business Funds
Many small business owners fall into the trap of not following the business formality of maintaining separate financial accounts for their businesses. Mixing business and personal finances can be quite chaotic during tax filing. Also, if your business is ever audited then it can get you into a lot of trouble with the IRS.
- Not Keeping A Mileage Log for Business Vehicles
Not all small business owners keep a mileage log for their business. As per the Globe and Mail, if you use your personal vehicle for the business travels then the fuel that you use could be claimed for deductions during tax filing. Ensure to support these with necessary documents.
- Not Having a Tax Organizer
It is important for every small business owner to have a tax organizer as it will provide you a glimpse of all the questions which the IRS asks your business such as about entertainment, travel and other important expenses. Keeping track of these things will save you time and will be a great help if you are ever audited.
- Having Disorganized Financial Records
A disorganized financial record is one of the most costly business tax mistakes made by small businesses. If you properly document your business expenses, it can help reduce your taxable income. Further, all your financial transactions should be recorded properly. Ensure that your financial documents such as financial statements and balance sheets are accurate and readily available anytime.
- Not Keeping Your Accountant Informed
This is one of the biggest tax mistakes most small business owners can make. If you don’t keep your accountant informed about what’s happening in your business, they won’t be able to provide you effective advice. Often when it’s time to file your taxes, it’s too late for them to help you make huge savings.
- Contributing Too Much to Your Qualified Retirement Plan or IRA
If you contribute more to your retirement plan than the law allows, you could be penalized with a 6% excess contribution penalty that will apply every year until you correct the excess.
- Over-reporting Income
If you over-report your income, it will lead you to pay more taxes than required. For instance, if you sell goods on which you collect the sales tax then your reportable income should not include the sales tax. You should always subtract the sales tax before reporting the income from the sales.
For an in depth review of your three past tax returns to see where you could save even more money, please contact me.
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Stephen Wallick started Stephen Wallick & Associates to provide tax and accounting services to Contractors, Real Estate Investors, and Realtors. Steve specializes in IRS Tax Resolution services and works with his clients to resolve cases under scrutiny by the IRS. As a tax professional and enrolled agent, Steve can save you money with IRS loopholes each year. With over 20 years going up against “The Man”, Steve is uniquely qualified to resolve even the toughest IRS cases.