The IRS isn’t noted for its sense of humor.
Sure, you might show up at an audit and try and crack a joke about some stuff “slipping through the cracks.” But nobody’s laughing … not even that auditor when he takes a nice big check home to the government.
So it’s best to avoid that situation, of course.
Just because you run a successful business doesn’t mean you know how to navigate the world of business taxes. And even if you do hire a professional, if you’ve made a slew of mistakes throughout the year, then they can only help you so much. Here are nine of the most common small business tax mistakes and how you can avoid them.
Not Separating Personal and Business Accounts
According to Inc.com, 45% of accountants cited not separating personal and business accounts as the most common mistake small business owners make. Even in a small business, taking a little bit from your personal account and a little bit from business account will have you scrambling at the end of the year to figure out exactly how much money you put into each account. And in the unfortunate event your business gets audited by the IRS, you’ll find it nearly impossible to prove your numbers. So set up accounts, maybe even with different institutions, and never mix the two.
Realizing You’ve Got a Lot More Taxes Past the IRS
So you thought that great big quarterly payment you made to Uncle Sam was the end of your tax bill? HA! Oh no, there are, of course, state and local taxes to consider, as well as payroll tax, self-employment tax, excise tax, property tax and sales tax. Yes, you have to pay sales tax whenever you’re selling something, though what that “something” is will vary from state to state. You may find yourself filling out up to 30 tax returns a year. So hiring a professional might save you some hassle.
Classifying Your Workers Improperly
Classifying your workers as contractors is tempting, since that takes the burden of payroll tax clearly off your shoulders and shifts it to theirs. But calling everyone a “contractor” means a lot more than not having them on an official payroll. If you’ve got people using your office to do work, and you control when they come in and when their work is due, well, if it walks like a duck … The IRS will see this and assess some pretty serious fines if they believe you’ve classified someone incorrectly. So if you’re trying to pay people as contractors, you’ll need to make sure you’re treating them that way.
Not Paying Self-Employment Tax
Just because you pay payroll taxes for your employees doesn’t mean you are exempt from self-employment tax for yourself. Typically, if you make more than $400 a year from your business you need to pay taxes on that.
Not Making Quarterly Tax Payments
You think the IRS sent you those payment vouchers to be helpful? No, that money is actually due to them on the date they so kindly printed on your tax statement. Just putting the money aside to pay at the end of the year isn’t going to cut it, you need to make those quarterly payments whether you want to or not. Failing to do so won’t land you in jail but it will incur interest and penalties, which is a big waste of money.
Thinking You Can Do You Taxes Yourself
So maybe you’ve got some rudimentary training in taxes and think you can save yourself a few hundred dollars by doing it yourself. This is kind of like taking a carpentry class at the local rec center and trying to remodel your house. Corporate tax is complicated! And while you might be able to get the basics done yourself, not hiring a professional will at best leave money on the table, and at worst lead to errors that get you in big trouble with the IRS. Think of hiring an accountant as part of the expense of paying taxes. Even though it will absolutely save you money in the long run.
Doing Your Own Payroll
On top of the other 900 things you need to do every day as a small business owner, payroll adds a special layer of complication that is both massively time-consuming and has great potential for disaster. Sure, your employees will not be happy if you mess up and they don’t get paid on time, but mess up the taxes and you’re looking at an even-more-unhappy IRS. Even if you started an LLC to protect your liability, if you report payroll taxes incorrectly, then company officers can still be held liable. So make sure to always, always hire an HR professional or outsource your payroll.
Taking Too Few Deductions on Your Taxes
The first thing to know here is that you can deduct expenses you incurred before you actually opened your doors. So those startup costs are absolutely tax deductible. Beyond that, stuff like clothing maintenance, car expenses, meals and portions of business travel expenses are deductible as well. We can’t go into the entire list here, but if you work with a professional, he or she can walk you through everything. Just make sure not to overdo it, or you might raise red flags with the IRS.
Failing to Keep a Tax Log
Yes, it’s tedious to pull out your phone and enter your business lunch into your expense-tracking app. And, yes, you’ll probably forget to do it once and a while. But if you should ever be audited about your expenses and you have a tangible (or at least visible) log of everything you purchased, you’ll shut your auditor up real quick. And can you really put a price of one-upping the IRS? No. No you cannot.
Of course, this is not an exhaustive list and it is only intended as a guideline. While these are some of the most common tax mistakes small businesses make, there are many other potential pitfalls to avoid when filing your corporate taxes. The best advice we can give you is to make sure you hire a tax professional and base your business’s tax decisions on their recommendations.