Small business owners have a lot on their plates. Unfortunately, jumping from task to task and spending the day putting out fires, as they often have to do to keep their business up and running, means mistakes will happen, and when those mistakes happen at tax time, they can be quite costly. If you are a small business owner, you should be aware of some of the most common tax mistakes your fellow small business owners make so that you don’t repeat them. Here are a few:
1. Making a Rookie Tax Mistake
If you are new to owning a small business, then you should understand all the tax authorities that you owe. Educate yourself about all of the taxes that small business owners owe, so that you aren’t surprised at tax time. Keep in mind that in addition to the IRS and your state agency, you may owe sales taxes, property taxes, payroll taxes, local taxes, self-employment taxes, and other specialty taxes.
If you have jumped into the new sharing economy as a dog walker, pet sitter, or Uber driver, for example, then you especially should be aware of self-employment taxes and the complicated nature of tax returns for small business owners. If you are uncomfortable completing tax returns, then it may be better to turn to a tax professional to avoid costly penalties or interest for errors.
2. Mixing Business and Personal Accounts and Expenses
One of the most common mistakes small business owners make is failing to have separate business and personal bank and credit accounts. Totally separate accounts simplify tax time, reporting, and bookkeeping. If small business owners are commingling accounts, they are apt to miss deductible business expenses and fail to report income. Separate accounts make expenses and income easier to identify, as does an accurate balance sheet.
3. Allowing Fear to Get in the Way of Legitimate Deductions
A little fear of the IRS is normal, but small business owners should not fear the IRS to the point of not taking legitimate deductions. Write off the things to which you are entitled as a small business owner, because it helps you to avoid paying more in taxes than you actually owe. Even if you get audited, you will be okay if the deductions are valid and you can substantiate them.
4. Failure to Pay on Time
Procrastinating at tax time is a costly error that small business owners need to avoid at all costs. Late payment penalties add up, as the IRS typically adds a penalty of 0.5%-1% per month to late income tax bills. Paying your taxes on time is essential to not owing the IRS more than you already do, so be sure to pay the full amount you owe on time, every time(if you can’t pay on time, read this). It’s also important to make payroll tax deposits on time, as the penalties for being late with them often are much higher.
5. Failing to Deduct Your Home Office
While there are some stipulations and clear rules for deducting a home office, it is worth the time it takes to do so. Small business owners do so much work at home that it makes financial sense to take the home office deduction if you qualify. Some small business owners who qualify for the home office deduction choose to go the prorated expenses route, while others take the dedicated expenses route. It’s recommended that you do the calculations for both types of expenses to see which is your better option for saving more at tax time.
Being a small business owner is complicated enough. Don’t make things harder on yourself by committing the most common errors at tax time. Consider the most common mistakes we’ve shared here and be sure you aren’t committing any of them this tax season.
Jeff Watson is a self-proclaimed math nerd. He firmly believes that math is the language of the universe and that by understanding mathematical concepts, we can better understand the world around us. He started DataRangers.org in the hopes of providing resources, games, and web-based calculators to help people of all ages battle their math fears.