Small business owners’ primary focus should be on operating their business and helping it grow and succeed. Federal taxes are not usually (or at least shouldn’t be) business owners’ primary concern. Yet, tax season can be a stressful period for small business owners. It is important for taxpayers (particularly those reporting their business operations on Schedule C) to stay organized and knowledgeable about federal tax requirements, so that mistakes and penalties can be avoided. Below are five common tax mistakes small businesses make and how to avoid them.
1. Not Documenting All Business Expenses.
As a small business owner, it is important to keep records of all expenses related to the business in order to take full advantage of deductions when filing one’s federal taxes. This includes travel expenses, meal receipts, cell phone bills, office supplies, and any other costs related to running the business. A common error is related to business mileage and improperly documenting (or failing to document) annual business mileage. Maintaining thorough records throughout the year will help ensure that all possible deductions are supported and recognized.
2. Failing To Report Cash Payments Received.
It is important for businesses to report all cash payments received during the year as income on their tax return. Although a business owner may view such payments as “untraceable” or “inconsequential,” cash must be included in revenue as gross receipts. Failing to report cash payments can result in penalties and interest, so it is best practice to always have an accurate record of all cash transactions made during the year.
3. Improperly Reporting Compensation to Employees and Contractors.
Depending on the business, a business owner may incur costs related to employees and/or independent contractors. Taxpayers must ensure that the individual worker is properly classified, as employees and independent contractors have different reporting requirements. For example, wages to employees are reported on Form W-2, while payments to independent contractors are reported on Form 1099. Further, in addition to wages, some employers provide certain benefits or perks to employees, such as: health insurance, meals, or housing allowances. These benefits may need to be reported on the employees’ Forms W-2.
4. Not Paying Estimated Taxes on Time.
As a small business owner, a taxpayer may generally be required to pay quarterly estimated taxes during the year—instead of waiting until April 15th (in 2023, April 18th). This is largely due to the fact that regular federal tax withholdings do not occur for business owners (compared to Form W-2 employees). If these estimated taxes are not paid timely, a taxpayer may face late payment penalties.
5. Not Staying Up to Date with Tax Law Changes.
Every year there are changes made in tax laws and regulations, which may affect a small business’ federal tax liability. It is important for small business owners to stay up to date with these changes, so that they don’t end up making costly mistakes during filing season. Speaking with a tax professional can alleviate this issue and even lead to proactive tax planning for your business.
Conclusion
Tax season can cause a great deal of stress for small business owners; however, proper preparation and knowledge about common mistakes can help alleviate some of that stress. Avoiding common mistakes like those listed above can help business owners approach their federal tax reporting with more confidence while avoiding certain repercussions from the IRS in the future.
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