You’re not a tax attorney or even a CPA; you’re a small business owner, trying to make your way in the world. You do your best, but the increasingly-complex tax code combined with the pressures of day-to-day business life creates a situation that’s simply prone to error. Try as you might, chances are you’re going to make some mistakes when filing your taxes, especially in those first few years of your business’ life.
Each one of these mistakes will cost you…
Fortunately, there are some things you can do to avoid the bigger mistakes. Understand where business owners typically goof up, and you can avoid those same mistakes going forward. Here are some of the most common mistakes to watch out for:
Inaccuracies on your return.
There are a number of areas you need to check and re-check on your tax return. For example, if you’ve moved since last April, you’re going to need to file a form 8822 (change of address) in order to let the IRS know. You also need to make sure you’re filing with the correct status. For example, if you’re filing as married you need to have been married before December 31st of the previous year. If your business isn’t a sole proprietorship, you need to file the correct tax forms for the type of structure you have.
Incorrectly classifying employees.
Your tax obligation is significantly lower for a contractor than it is for an employee. In addition, there are different rules you have to follow for employees that you don’t have to follow for independent contractors. Know the rules that separate employees from contractor, and follow them strictly. If you don’t, you can wind up not only facing tax penalties and fees, but in some cases it can even lead to charges against you.
Not documenting deductions.
You need to keep every receipt for every expense your business incurs. Now, during the year, it’s not always clear which expenses will be deductible and which ones won’t, so you need to keep all of your receipts and keep them organized in some fashion. It’s better to toss an unnecessary receipt at the end of the year than it is to miss a deduction because it’s not documented.
Poor organization of tax records.
Having all of your records in front of you makes tax preparation much easier. Not only do you need to develop an effective system of organization for your records throughout the year, you need to make sure that those records are properly organized and preserved after tax time. Too many small business owners find themselves being audited without being certain what happened to all of those receipts they had back in April when they filed their taxes.
Improper documentation for business vehicle use.
If you’re using your private vehicle for business purposes, you can deduct the mileage you use when you’re using it for business. However, you need to keep meticulous records for that mileage. A daily mileage log is the most reliable and verifiable way to do this. There are plenty of ways to do this electronically as well, such as with various smart phone apps. There’s really no reason today why you wouldn’t be able to correctly document vehicle use.
Not accounting for all of your income.
Depending on your type of business, you might be receiving 1099s from clients. You might work a regular job in addition to running your business, and so you’ll receive a W-2 as well. You need to make sure all of your sources of income are documented, and that they’re accounted for on your tax return. Recent changes in IRS procedures – such as requiring third-party payment processors like PayPal to issue 1099s – make it more and more likely that you’ll get caught if you don’t report a given source of income. That can result in penalties and, in some cases, even criminal charges.
Failure to file electronically.
Filing electronically makes the most sense in this day and age. Not only can you file electronically without any charge, you’re also going to get your refund much faster than if you file a paper return. If you do choose to send in a paper return, make sure you send it certified.
Each one of these mistakes will cost you. They might cost you added time as you scramble to get things together, or they might cost you money in missed deductions. Work with your tax professional to make sure you’re avoiding these mistakes both when you file and throughout the year.
Article courtesy of SCORE.