As a small business owner, filing taxes can be a daunting task. Even with the help of a professional accountant, it's easy to make mistakes that can lead to costly penalties and fines. In this blog, we'll discuss common tax mistakes small business owners make and provide tips on how to avoid them.
- Misclassifying Workers:
One common mistake small business owners make is misclassifying workers as independent contractors instead of employees. This mistake can result in penalties and back taxes owed. To avoid this mistake, make sure you understand the differences between independent contractors and employees and properly classify your workers.
Example: A small business owner hires a graphic designer to create a logo for their business. Instead of hiring the graphic designer as an employee, the business owner classifies them as an independent contractor. However, the graphic designer works exclusively for the business owner, uses the business owner's equipment, and follows the business owner's specific instructions. In this case, the graphic designer should have been classified as an employee.
- Failing to Keep Accurate Records:
Keeping accurate records is essential for small business owners when it comes to taxes. Failure to do so can result in errors on tax returns and penalties for underpayment or late payment of taxes. To avoid this mistake, make sure to keep detailed records of all business transactions, including receipts, invoices, and bank statements.
Example: A small business owner forgets to keep track of all their business expenses throughout the year. As a result, they are unable to claim all of their deductions on their tax return, leading to a higher tax bill and potential penalties.
- Not Understanding Deductions:
Small business owners are eligible for a variety of tax deductions, but many fail to take advantage of them. Deductions can help reduce taxable income and lower tax bills. To avoid this mistake, make sure to research and understand all of the deductions available to small business owners. For a comprehensive list of deductions, check out our blog post on The Top Tax Deductions for Small Business Owners.
Example: A small business owner doesn't realize that they can deduct the cost of a home office on their tax return. As a result, they miss out on a valuable deduction that could have lowered their tax bill.
- Mixing Business and Personal Expenses:
Another common tax mistake small business owners make is mixing business and personal expenses. This can make it difficult to keep track of deductible expenses and lead to errors on tax returns. To avoid this mistake, make sure to keep business and personal expenses separate.
Example: A small business owner uses their personal credit card to purchase office supplies for their business. When it comes time to file their taxes, they have a difficult time separating personal expenses from business expenses, leading to errors on their tax return.
- Not Filing or Paying Taxes on Time:
Failing to file or pay taxes on time can result in penalties and interest charges. To avoid this mistake, make sure to understand tax deadlines and plan ahead to ensure all taxes are filed and paid on time.
Example: A small business owner forgets to file their taxes by the deadline and is hit with a penalty for late filing. They also failed to pay their taxes on time, resulting in additional penalties and interest charges.
Avoiding tax mistakes is essential for small business owners. By understanding common mistakes and taking steps to avoid them, small business owners can save money and avoid costly penalties. Contact the experts at Accountants Now for help with your tax planning and preparation to ensure that you avoid these common tax mistakes.