Mistakes Small Business Owners Make When Filing Taxes
Filing small business taxes is an important process for every business, although it’s enjoyable to very few. In fact, some flat-out dread it. The problem is that some business owners think of taxes only in the weeks leading up to Tax Day, which is typically April 15. But there is a lot more to consider. Read through these six common mistakes small business owners make so you can avoid making them in your business.
Not Filing or Paying Taxes on Time
If you miss the tax filing deadline, your business will be assessed a 5% per month penalty by the IRS that will continue to increase until the return is filed. If you neglect to pay your taxes, the IRS can penalize you with a maximum of 25% of the total tax bill, plus a late payment penalty of .5% each month after the deadline.
The IRS has extended the filing deadline for individuals, including those who pay self-employment tax, from April 15, 2021, to May 17, 2021.
It’s obvious why you need to make sure you file your taxes and make your payment on time; the penalties are severe. Worst case scenario, you can request a filing extension to give you a little more time and avoid the penalties. The IRS site can help you figure out which form you need to submit for a tax-filing extension.
Even if you have filed a tax-filing extension, you would still need to pay some tax by the original due date. If you don't have the money, you need to find some alternative ways to work things out.
Not Paying Estimated Taxes During the Year
According to the IRS, if you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe $1,000 or more when you file your return.
If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more. Your bookkeeper can advise you on the estimated tax payments you should be submitting. You can also figure out how much you should pay in estimated taxes with the Form 1040-ES worksheet.
Not Applying the Right Business Deductions
If you don’t want to pay more than you actually owe on your taxes, then business deductions are the way to do it. There are so many deductions that your business may qualify for including office furniture and supplies, advertising, licenses, equipment, start-up expenses and more. Review this list of potential business tax deductions to see where you can cut back on what you owe.
Not Tracking Expenses Accurately
It is very difficult to take any tax deductions if you don’t have a record of incurring those expenses. This means you have to be very detailed with your business records, including saving receipts, keeping a travel log for mileage, and tracking and categorizing expenses.
One of the best ways to do this is by working with a qualified bookkeeper all year long. Not only can a small business bookkeeper advise you on what could be deductible and how to track those expenses, but a bookkeeper can also streamline the tax process by managing your books every month, then compiling your tax information for an accountant to use when it comes time to file your taxes.
Not Separating Business and Personal Expenses
If you muddy the financial waters by intermingling your personal and business expenses you could be creating a big mess that will have to be cleaned up when tax time rolls around. Separate your business and personal expenses by maintaining (and using) separate bank and credit card accounts, keeping receipts separate, and paying yourself a salary instead of drawing directly from your business accounts. This is another area where a bookkeeper can advise you on how best to keep expenses separate.
Not Using an Accountant
It’s very tempting to go the less expensive route and do your business taxes yourself with business tax software. While this may work for sole-proprietorships with an uncomplicated setup, it isn’t a good idea for more complex businesses. Not only do you run the risk of misfiling your return, but you may miss a few major deductions simply because you don’t know that you qualify for them.
When choosing an accountant, make sure they are certified and have experience in your industry as well as with tax planning. You may also want to get references or go with an accountant that has been referred to you by a colleague. The act of filing taxes may happen just once per year, but the tax process has required tasks, payments, and considerations that have implications all year long. Avoiding the mistakes listed here will help make the tax filing process much less painful.