Part of filing taxes successfully for your company involves knowing what not to do. Here are mistakes with taxes to avoid for small businesses.
Every year, more than 627,000 small business owners open their doors and welcome clients for the first time and that first year comes with a lot of challenges. The most common issue small business owners face is figuring out how to file their taxes properly.
Unfortunately, making mistakes with taxes is both incredibly common and costly. If you’re not careful, even a small mistake can change how much you owe the IRS. However, you can’t avoid making mistakes unless you know what to watch for.
Here are a few of the most common tax mistakes businesses make each year and what you can do to avoid making them yourself.
- Combining Your Business and Personal Finances
One of the biggest mistakes small business owners make is combining their business and personal finances. This happens when you pay for your business’s expenses and submit deposits with your personal checking account.
While it might not seem like a big deal, it can cause major problems come tax time.
When you combine your finances, you won’t be able to prove which transactions are for your business and which ones are personal. This makes it difficult to take advantage of tax deductions and increases your risk of undergoing an IRS audit.
Instead, open a dedicated business checking account and a credit card before you open your doors for the first time. This way, you’ll be able to keep your personal expenses separate from the very beginning.
If you’ve already opened your business but haven’t opened a business bank account, do so as soon as possible. The sooner you start keeping track of your business-related expenses and finances, the better off you’ll be when tax season rolls around.
- Not Paying Quarterly Taxes on Time
The IRS expects every business owner to pay quarterly estimated taxes every year. The amount you’re expected to pay relates directly to how much money you’re expected to earn over the course of the year.
Take a look at your projected earnings for the year and make the appropriate quarterly payments on time. If you miss a payment or fail to pay your estimated taxes at all, you could end up having to pay a costly fine to the IRS.
That fine will be in addition to the full amount of taxes you owe at the end of the year. If you’re not careful, this could end up adding thousands of dollars to your tax bill.
- Guessing on Your Income at Tax Time
The IRS expects you to accurately report all sources of income and the amount of income earned at the end of the year. If you overestimate how much you earn, you’ll end up paying more in taxes than you deserve. However, if you underreport your income, you’ll end up facing some serious repercussions.
Underreporting your income will lower your tax liability at least initially. While this seems like it’s in your favor, it actually increases your risk of fines and can get you in trouble with the IRS.
The IRS will audit your business and will do everything they can to find the missing income on your books. Once they figure out how much you owe, you’ll have to pay it back in full plus any fines associated with the underreported income.
Worse, you’ll increase your risk for future audits as the IRS will want to make sure you report your income accurately in the years to come.
- Waiting Until the Last Minute to Start Bookkeeping
Taxes are always easier to handle when you have accurate books and records in place. Though it’s possible to compile those documents at the end of the year, doing so puts a serious strain on your business.
Instead of waiting until the last minute, start keeping good records as soon as possible. Make a note of all of your business’s regular expenses, employee payments, and income earned. If you’re currently repaying loans, keep track of each payment you make and note the amount of interest you pay each time.
When it comes to business bookkeeping, there’s no such thing as too much information. The more documentation you have on hand, the easier it will be to keep track of where your money is going and identify possible deductions that can lower your total tax liability.
- Handling Everything on Your Own
Though it’s possible to file taxes on your own and manage your own accounting, doing so isn’t always in your best interest. Remember, the tax code changes every year, and staying on top of those changes is notoriously difficult.
You have better things to do with your time like running your business and making sure you’re keeping your customers happy.
The best thing you can do is to find a tax advisor and let them help you manage your business’s accounting process. They’ll make sure you’re able to file your taxes on time and are always on-hand to answer any questions that might pop up throughout the year.
Even better, they’ll make sure your taxes get filed accurately, so you won’t have to worry about audits or overpaying.
- Not Taking Advantage of Deductions
No matter what industry you’re in, your business will qualify for certain tax deductions each year. Those deductions can save you thousands on your tax liability, but you need to know which ones you qualify for in the first place.
Some of the deductions are so obscure that they’re easy to miss out on.
Speak with your accountant and find out which deductions you can claim. Then, make sure you claim them when you file at the end of the year.
Don’t Make These Mistakes With Taxes Each Year
These are just a few of the most common tax mistakes business owners make every year. Familiarize yourself with them now so you can avoid making these mistakes with taxes both now and in the future.
Remember, taxes are legally required, but when you actively avoid making mistakes, you’ll simplify your filing process and reduce the amount you owe.
Looking for more helpful tips to make filing taxes easy? Check out our latest posts.
