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8 common mistakes small business owners make when filing their taxes

Posted by Kanika Sinha

August 6, 2021    |     4-minute read (1077 words)

The necessity of focusing on customer acquisition and sales means taxes often take a back seat for small businesses. Many owners don’t think about taxes until the final days before taxes are due. Others get mired in the complexities of the process and end up accidentally violating tax codes.

The obvious problem is that these scenarios leave businesses vulnerable to late fees and may even trigger an IRS audit. Not to mention, paying late or paying incorrectly sends money and time down the drain.

Being cognizant of common mistakes can help you minimize tax-time stress. Get familiar with these eight frequent tax mistakes small business owners are prone to making.

  1. Not using the right business structure
This is one of the biggest mistakes that many small business owners encounter. Without a clear understanding of the different business structures, first-time entrepreneurs sometimes make a hasty decision when selecting their legal business entity type.

In a bid to get the business up and running quickly, too often owners check the box on the registration form that seems right at the time, but without a clear grasp of the associated tax liabilities and benefits. Only when they go to file their tax return or apply for a  loan do they realize that they have set up the entity incorrectly. 

Tip: Be prudent when it comes to picking your business structure. Investigate ahead of time which one gives you the best balance of legal protections and tax benefits.

  1. Missing deadlines
Taxes aren’t always at the top of mind when you’re running a small business. There are a million other things to do, so missing the deadline is an easy mistake to make.

But If you don’t pay on time, your business is apt to be levied penalties. For example, S corporation and partnership returns filed late when tax is owed are usually assessed a late-filing penalty of 5% a month, up to a maximum of 25% of your total tax bill, plus interest until you pay off the balance.

In some cases — such as if you have a valid explanation for missing the deadline — you can request a tax-filing extension from the IRS to give you a little more time and also avoid the penalties. Though it’s a free service, it entails way more formalities than filing a tax return. 

Tip: Calendar the important dates and set advance reminders so that you file on time.

  1. Not paying estimated taxes during the year
The IRS requires small business owners to pay estimated payments if they expect to owe tax of $1,000 or more when their return is filed. But, paying these quarterly taxes throughout the year is the bane of many business owners, who may either fail to comply or underestimate taxes and end up owing penalties. 

If you need to pay estimated taxes, you can use Form 1040-ES to figure out your estimated taxes. But make sure to account for all of the taxes you will owe — including the self-employment tax, social security and medicare taxes. 

Tip: Open a separate bank account to tuck away your estimated taxes to be paid. This will save you a lot of headaches come tax season.

  1. Improperly tracking expenses
Because they are often juggling many things at once, small business owners may struggle to keep a proper record of expenses incurred. But that represents a missed opportunity for tax deductions.

Handle your business expenses records with meticulous care and save every receipt, keep a daily travel log for mileage, and track and categorize every expense. 

Tip: Consider using over-the-counter software or apps to track your expenses. Or outsource to a qualified bookkeeper to maintain accurate and up-to-date records of your business expenses.

  1. Not claiming the right business deductions
Unless they have a good understanding of tax codes, a lot of small business owners neglect to take advantage of certain deductions and miss out on the opportunity to save money. It is not uncommon for small business owners to end up paying more than they actually owe on their taxes. 

The IRS permits a slew of possible deductions for small businesses in the U.S., including business meals, insurance, office furniture and supplies, travel expenses, advertising, licenses, startup expenses and more. Be proactive in your tax planning to figure out which deductions your business qualifies for so you minimize your tax bill. 

Tip: Review the list of potential business tax deductions on the IRS website before filing.

  1. Misclassifying employees 
Being a small business owner, it is likely that your list of employees isn’t very long. But with multiple hats worn by a single employee, you might be unsure of their actual job title and end up classifying them incorrectly.

This can have long-term, expensive consequences for your business, even leading to steep penalties, interest and legal costs.

Tip: Have a good understanding of IRS tax codes on employee classification before making your payroll so as to maintain compliance.

  1. Mixing business and personal expenses
By intermingling personal and business expenses, you could create a mess for your business that will be a challenge to clean up when tax time rolls around.

Keep separate accounts and credit cards for your business expenses. This will not only make it easier to show the distinction, but also to track deductible expenses. 

Tip: Instead of drawing from your business accounts, pay yourself a salary to streamline your company expenses.

  1. Not using an accountant
Owning a small business, often operated with a limited budget, it can be tempting for entrepreneurs to go the less-expensive route and do their own business taxes with software or maybe a mobile app.

While this may work for sole proprietorships with a simple business setup, it isn’t a good idea if you have a more complex business structure. You risk misfiling your business tax return and could miss out on the benefit of some major deductions simply because you don’t know your business qualifies.

Tip: Make sure you choose a CPA with experience in your industry as well as with tax planning.

Takeaway: Though you may be required to file your business taxes just once per year, the process entails complexities that have implications all year long. One of the best ways to always stay ahead of the tax season is to outsource tax services. With professionals tracking your numbers correctly, you will be able to file your return correctly and on time while maximizing your tax savings. 

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