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Six Common Tax Mistakes Small Business Owners Make

Taxes are one of the many requirements to be a successful small business owner. But with the number of rules and regulations you must remember, it’s challenging to avoid mistakes now and then. However, these small errors can be costly. They can lead to fines and other serious penalties. If you want to learn how to make accurate tax filings for your business, we’re here to help. In this blog, we’ll explore some of the common tax mistakes first-time business owners make and how you can avoid them. 

6 Common Tax Mistakes & How You Can Avoid Them

There are six tax mistakes small business owners commonly make, and here’s how you can avoid each one:

Filling Out & Submitting The Wrong Form

There are specific forms you need to fill out and submit to pay your business’s taxes according to the structure and tax status of your business.Sole proprietorships, partnerships, and LLCs must file their individual income tax returns using Form 1040. On the other hand, corporations are supposed to use Form 1040-SR or Schedule C to report their income. If you filed the wrong form, the IRS will likely reject it, and you’ll have to refile your application. To avoid this, we suggest listing down all the forms your business needs to file. 

Missing Deadlines

Each tax category has its own deadline. For instance, payroll, estimated income, and sales taxes must be filed quarterly. Meanwhile, income tax returns must be submitted annually. Since it’s common for small business owners to forget their deadlines, the IRS publishes a list of deadlines for individuals and businesses yearly. Aside from this, you can also create a calendar indicating which taxes are due and when.When you don’t pay your business’s taxes on time, your balance will accrue interest and penalties. If you neglect them for a long time, your debts will ultimately increase. After a while, the IRS will file a Notice of Federal Tax Lien, alerting creditors that they have the right to your assets. Fortunately, you can remove that lien with the help of tax resolution services. Tax resolution is where you work with a tax expert to solve your problems with the IRS.If you’re having trouble paying off your debts, tax resolution services can help you develop and propose a payment plan that fits your needs. This way, the IRS doesn’t have to seize your assets anymore. 

Underpaying Estimated Taxes

If you’re in a sole proprietorship, partnership, or LLC, you have to pay self-employment taxes. The IRS expects self-employed taxpayers like you to pay a close estimate of what you owe them quarterly. If you underpay the IRS, you’ll get fined. Fortunately, this mistake is highly preventable. You can make an accurate calculation of your estimated taxes by using Form 1040-ES. We also recommend using your income projection to determine how much taxes you have to pay. 

Making The Wrong Deductions

Some structures are allowed to make deductions on their tax reports. For example, pass-through entities like LLCs have the Qualified Business Income Deduction (QBI).But keep in mind that there’s a limit to how much and what you can deduct from your business’s taxes. The limit for QBI tax breaks varies depending on your income level and overall structure.What happens when you make the wrong deductions? The IRS could conduct an audit on your business. You can use the IRS Publication 535 to determine what tax breaks your business is entitled to make. This way, you can make the right deductions on your next filing. 

Underreporting Your Income

Underreporting is a common tax mistake that causes tax gaps. The IRS heavily penalizes these errors, especially if they were done intentionally. If they think you were negligent with your reporting, you could receive a 20% penalty. However, if the IRS has reason to believe you intended not to report your entire income, the penalty can be as high as 75%. So, to avoid underreporting, keep accurate records of your income throughout the year. We also recommend that you use the information from your previous returns so that you know what needs to be included in your report. Aside from this, you can also use form 1040-X to amend your reports. Submitting it will allow you to correct any mistakes you’ve made on your reported income, deductions, and other similar errors. 

Poor Record-Keeping

Poor record-keeping is one of the few reasons why tax season can be extremely stressful for some people. It makes it harder for you to track your income and expenses, which can lead to underreporting income or missing out on deductions. To ensure your business’s tax filings are accurate, you must have a good record-keeping system. There are plenty of programs that you could use for this, such as QuickBooks. QuickBooks is an accounting software popular among small businesses. You can use it to track income, expenses, and other transactions so that when tax season comes, you’ll have a much easier time filing your returns.

Takeaway

In conclusion, taxes are a fundamental aspect of running a small business. Thousands of budding entrepreneurs make tax mistakes every time. What’s important is that you learn how to correct them early on. Now that you know the common pitfalls of filing taxes, you’ll be able to avoid them next tax season. You can ensure your business stays financially sound and compliant with federal and state tax regulations.

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