Making common tax mistakes on your small business finances can be costly, stressful and time consuming to correct. The best way to avoid mistakes is to educate yourself about your responsibilities and then line up the help you need to complete this necessary task.
The first step toward avoiding tax mishaps is to accept that managing and paying taxes is part of running your company right along with billing, hiring and selling. It may not be your favorite part, but the responsibilities associated with it will be more manageable if you face them head on.
Review the following mistakes to help determine how well you are managing your own taxes.
Not getting help
Some business owners deftly manage and file their business taxes themselves, but most businesses benefit from the help of a tax preparer to keep up to date with changes in tax rules. The cost of the help is usually more than offset when you avoid penalties and increase deductions. It can also help immensely to use a payroll service, since these services are typically responsible for filing all payroll and employment taxes for any employees you may have.
Not claiming the home office deduction
If you use a portion of your home exclusively for business, you may qualify for the home office deduction. Some people believe that this deduction flags your return for an audit, but given the prevalence of home-based businesses, this is not likely. Speak with your tax preparer or visit the IRS website (www.irs.gov) for a list of specifications for claiming this deduction.
Not understanding what an extension is
If you simply cannot file your taxes on time, you can, in many cases, file an extension. The big mistake with extensions is failing to understand that you are being granted an extension to file, but not to pay. In most cases, from the minute tax day passes, you will be accruing interest if you owed money on tax day. You may also face penalties for filing late.
Failing to pay quarterly taxes
Most small businesses owe quarterly taxes on money they have earned. Some businesses do not pay these taxes because they do not have the cash on hand or fail to realize that they are required to. There are many ways to estimate how much you will owe in each quarterly payment. Work with your tax preparer or visit the IRS for guidance.
Not keeping good records
Piecing together expense records right before tax time is a mistake. Not only is it challenging to find everything you need to fill accurate taxes, it also typically results in an under reporting of tax deductions, since some expenses are bound to be overlooked. Digital expense tracking tools-Shoeboxed and Lemon, among many others-can help with this. With these tools, you can scan and store receipts as you get them.
Misclassifying employees as independent contractors
Independent contractors and employees have very different tax implications for your small business and misclassifying staff is a common tax mistake. If you label a staffer as an independent contractor, when he or she really is an employee, you will owe taxes and likely penalties to tax authorities. The centerpiece of this decision has to do with how work is completed. Independent contractors hold the control over the work they complete, including using their own tools and determining how a task should be done. Employees on the other hand, use your tools and work within your framework for how a job should be completed. Other details are involved in making this decision, so check with your tax preparer to be sure you are making the right choice.
Tracking and completing taxes carefully and on time is a necessary part of running a small company well. Developing processes for managing this task, and lining up the right resources to make smart tax decisions, can help to ease the pain of tax filing.
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