Small business owners face many obstacles, and tax season only intensifies these challenges. Mistakes made during tax preparation can cost small business owners personally and financially. Fostering an awareness of the common mistakes made by small business owners will help tax benefits for small business owners face many obstacles, and tax season only intensifies these challenges. Mistakes made during tax preparation and keep more money in their pockets. For instance, failing to track or correctly categorize may incur unnecessary financial burdens. The same is true about staying on top of tax law changes- you need this knowledge to avoid taking associated deductions or being charged penalties for noncompliance with the law- or worse, both.
Misclassifying Employees as Independent Contractors
The most common tax mistake made by small business owners is correctly classifying employees as independent contractors. The IRS uses specific criteria for distinguishing employees from independent contractors. However, classifying incorrectly can lead to back taxes, interest, and fines, which can add up quickly. Generally, employees are more controlled and guided within a business, whereas independent contractors are freer. Incorrect classification can also lead to complications with benefits and wage obligations. To avoid misclassifying employees, review IRS webinars or guidelines to gather information about your audit risk and state requirements, and consult with a tax professional to ensure classification suitability and tax compliance. In this way, you can take advantage of tax benefits related to business use.
Neglecting to Keep Proper Records
Poor record keeping is another critical mistake costing small business owners their tax benefits. Without adequate records of all financial events, receipts, or otherwise, deductions are easy to miss, creating a high likelihood of audit. By adopting a consistent bookkeeping method and keeping books up to date regularly, small business owners can carry their tax compliance burdens much more steadily and make the most of their tax benefits.
Failing to Deduct Business Expenses Correctly
A common problem that small business owners encounter is deducting business expenses legitimately due to needing clarification on which type of business expense is qualified for deduction. The only deductible expenses are ordinary, necessary, and directly related to your ordinary and essential business operations. Some everyday deductible expenses include office supplies, marketing, and travel expenses incurred for business purposes, not personal purposes. It is prohibited to deduct personal or business-unrelated expenses. Another common issue small business owners encounter concerns learning the differences between capital expenses and expenses related to the business. Capital expenses like equipment must be depreciated over the period typically exceeding 365 days; operational expenses can be deducted on current year forms. Misunderstanding these differences will lead to inaccurate filings that disallow deductions or credits, which is significant over time. To avoid errors in preparation, deductions, and credits while maximizing availability to small businesses, obtain tax guidance from the IRS website or employ a preparer or advisory service to assist in preparation questions or tax positions detected or researched.
Ignoring Tax Deadlines and Payment Requirements
Be sure to complete related or dependent tax obligations to the tax deadlines for filing reports or payments. Mark essential tax dates on your calendar to ensure you have notice of tax deadlines. Include reminders in your calendar to assist with proper filing and payments of related, dependent tax obligations for business. The IRS will advise if quarterly estimated costs related to the prior year are required. Failure to make related, dependent estimated tax payments could be subject to some substantive penalty or interest. Using tax software to secure and maximize engagement in the services of a tax professional can assist with compliance with the deadlines for required forms and payments and any positions thereof. Quickly moving through tax obligations is vital to a small business; however, within tax obligations, being proactive to secure some level or degrees of benefits or deductions will ensure prosperity efforts in remaining financially stable and maximized for business.
Conclusion
By being aware of and watching these common tax errors, small business owners can optimize, lower their risk, and concentrate more on growing their business. Taking proactive steps to classify workers, comprehend accurate documentation, deduct expenses appropriately, and manage time by deadlines will enable small businesses to maximize their financial health.
