10 Common Tax Mistakes Small Business Owners Make And How To Avoid Them
Tax season can be a stressful time for small business owners. Navigating the complexities of the tax code while trying to focus on running your business can lead to costly mistakes. The last thing you want to do after a long week is sit down and think about taxes, but by understanding the common tax pitfalls and taking proactive steps, you can minimize your tax liability and keep your business on the right track. In this article, we'll discuss ten common tax mistakes small business owners make and some tips on how to avoid them.
Mixing Personal and Business Expenses: One of the most common errors is failing to separate personal and business expenses. Maintain separate bank accounts and credit cards for your business and track expenses diligently. By doing so, you'll have accurate records that make it easier to claim deductions and prevent IRS scrutiny.
Neglecting Estimated Tax Payments: Failing to make quarterly estimated tax payments can result in penalties and interest charges. Stay organized and estimate your tax liability throughout the year. Set aside funds and make timely payments to avoid surprises at tax time.
Misclassifying Employees as Independent Contractors: Misclassifying employees as independent contractors to avoid payroll taxes can lead to severe penalties. Understand the criteria that differentiate employees from contractors, such as control over work and financial arrangements. Consult a tax professional or legal advisor if you're unsure.
Ignoring Deductible Expenses: Small business owners often miss out on valuable deductions by overlooking eligible expenses. Stay informed about deductible business expenses such as office supplies, professional fees, travel, and home office deductions. Keep accurate records and consult a tax professional to maximize your deductions.
Not Keeping Track of Mileage: If you use your vehicle for business purposes, keeping track of your mileage can result in significant tax savings. Utilize mileage tracking apps or maintain a detailed logbook to record business-related travel. This documentation will help you accurately calculate your deductible mileage.
Failing to Plan for Tax Credits: Many small business owners are unaware of the tax credits available to them. Research and identify tax credits specific to your industry or business activities. Examples include the Research and Development (R&D) Tax Credit, Work Opportunity Tax Credit (WOTC), and Small Business Health Care Tax Credit. Leverage these credits to reduce your tax burden.
Inadequate Record Keeping: Poor record keeping can create a lot of tax problems. Maintain organized records of income, expenses, receipts, invoices, and other relevant financial documents. Consider using cloud-based accounting software to streamline record keeping and simplify tax preparation.
Overlooking State and Local Taxes: Business owners often focus solely on federal taxes and overlook state and local tax obligations. Different jurisdictions have their own tax rules and regulations, including sales tax, property tax, and franchise tax. Stay informed and comply with all applicable state and local tax requirements.
Neglecting to File on Time: Late filing can result in penalties and interest charges. Mark tax deadlines on your calendar and create a system to ensure timely filing. Consider setting up reminders and engaging a tax professional who can help you meet all deadlines.
Not Seeking Professional Help: Tax laws and regulations are complex and ever-changing. Trying to handle your business taxes alone may lead to costly errors. Hiring a qualified tax professional or accountant can provide invaluable guidance, ensuring compliance and maximizing tax benefits.
Being proactive instead of reactive when it comes to taxes can make a world of difference to the success of your business. Send us a message and see how we can help.
