For many business owners, tax time is a stressful time. But, it doesn’t have to be this way. With the right foresight and planning, you can breeze through your filing, make decisions that benefit your business, and most importantly, avoid costly tax mistakes.
The Importance of Avoiding Tax Mistakes
Tax mistakes can create major headaches for you and your business. Making a mistake with your filing can lead to more than extra stress and paperwork.
When you make tax mistakes, you may:
- Increase the amount of taxes you owe
- Miss opportunities to decrease the amount of taxes you owe
- End up with penalties and fines
- Be required to pay interest
- Put up red flags that could lead to an audit
Your business must put its best foot forward when it comes to tax filing, as avoiding tax mistakes can save you both time and money.
10 Tax Mistakes for Your Small Business to Avoid
Plan ahead, and lay out a tax strategy that prevents you from making errors that you have to fix later. Here are ten of the most common tax mistakes that small businesses make and how you can avoid them.
#1) Failing to Plan
Waiting until the last minute to deal with your taxes is one of the biggest mistakes of all. When you are rushed, you are more likely to make errors and miss opportunities. Your taxes shouldn’t be something you think about the day or month before you file. Tax planning should be a part of your year-round business planning.
Read More: 7 Reasons to Start Year-End Tax Planning Right Now
#2) Misrepresenting Your Income
When you file your business taxes, be sure to report all income and expenses. Don’t forget about miscellaneous income or fail to report revenue that came through other channels (such as virtual currency). Also, don’t fail to track and report all expenses incurred throughout the year. Every penny counts when it comes to avoiding audits and decreasing your tax liability.
#3) Overlooking Deductions
While many deductions will be identified through your financial reporting, there may be other deductions that are easy to overlook. Review deductions that might not be as obvious such as vehicle and home office expenses, education costs, and credit card fees.
Read More: These 6 Small Business Tax Deductions Are Often Overlooked
#4) Underpaying (Or Not Paying) Estimated Taxes
Small businesses of all sizes should be paying quarterly estimated taxes throughout the year. It’s important to make these payments — and make payments that cover the full cost of your estimated taxes. Use financial forecasting to make the correct projections because underpaying can result in tax penalties.
#5) Filing Under the Wrong Tax Classification
Because there is no set tax structure for a limited liability corporation (LLC), you can choose a tax classification that works best for your business based on your number of employees, income, number of owners, etc. Talk with a tax accountant to determine what tax classification is best for your business.
#6) Misclassifying Your Staff
Misclassification can lead to other tax mistakes as it relates to your employees. If you work with freelancers, subcontractors, or consultants, ensure that you are following the guidelines as it relates to independent contractors. Also, distribute 1099-MISC Forms to all workers who are not full-time employees at your business.
#7) Failing to Pay Employment Taxes
Knowing the proper way to classify your staff will also help you avoid another tax mistake. When you have full-time employees on your team, you are expected to deposit their withheld taxes throughout the year. If you fail to do so, you may be charged with tax penalties. Work with your payroll provider to properly deposit employee taxes throughout the year.
Related: Build an Accurate Business Budget In 8 Simple Steps
#8) Overlooking Your Retirement
As a business owner, it’s important to think about your future. There is no one to plan for your retirement but you, so you must be the one to create a retirement plan. It not only creates a foundation for your future, but it can also impact the taxes you own. Talk to your tax accountant about which retirement plans can reduce your tax liability.
#9) Missing Deadlines
One of the worst tax mistakes is missing a deadline. If you miss a deadline and you own money, you may be required to pay interest and penalties. Be prepared to file extensions when needed if you can’t meet deadlines, and keep an eye out for important deadlines such as:
- Paying estimated tax payments
- Making IRA contribution
- Filing tax returns
- Filing extended tax returns
#10) Not Keeping Organized Books
It’s easy to file taxes on time with the correct information when you have organized bookkeeping records. Don’t wing it when it comes to your business finances. If you don’t have an on-site bookkeeper, work with an outsourced bookkeeper to ensure that you:
- Input all expenses and income
- Properly classify expenses and separate personal and business expenses
- Can easily pull accurate, up-to-date documentation related to your finances
Recommended Reading: Use This End-of-The-Year Checklist to Make Your Business More Profitable
Avoid Tax Mistakes This Year (And Every Year)
Tax mistakes can be costly to your wallet and your peace of mind. Make sure you avoid errors that can disrupt your business operation and cash flow.
Work with a professional to start your business tax preparation early, and create a plan to avoid tax mistakes while getting the best tax benefits available for your business.
Schedule a free discovery call to find out how CFO2U can help you get your books in order before the end of the year so you can breeze through your tax filings — and know that you are avoiding tax mistakes that can cost you time and money. Get started today. Schedule your free discovery call.
- 9 Questions for a Potential CPA: What to Ask When Hiring a Tax Professional - November 5, 2024
- Important Hurricane Recovery Resources for Small Businesses - October 17, 2024
- Want to Avoid a Surprise Tax Bill? Do This Right Now. - September 24, 2024
