Taxes are an important part of life and whether you are a consumer or a small business, you must file them. Small businesses are responsible for turning in their taxes at the same time as everyone else and being new to the business world or not knowing how to do your taxes is not an excuse for not turning them in.
No one likes to think about taxes and it can be quite frustrating to sit down and think about how much money you may be shoveling out of your bank account. Since taxes are confusing and they are by no means simple and easy, you may find that your small business makes a mistake or two on your return.
It is vital that you ensure your tax return is filled out correctly. Below, we will go over some of the most common tax mistakes that all small businesses make or have made at some point or another.
Filling Out Taxes without a Professional Tax Agent
Many small business owners think that they can fill out their taxes themselves and they turn the cold shoulder towards professional help. It is important that you do not fill out and file your taxes if you do not know what you are doing. This leads to errors, penalties, and much more.
Working with a professional tax agent allows you to get the counseling and help you need on your tax forms. You will be able to speak with your tax accountant and let them know about your businesses income and much more. He or she will advise you how you should be filing and what deductions to take.
Organizing Your Business Receipts is Too Time Consuming
If you shop a lot for your business, you may think that keeping every receipt is pointless. You may as well just guess at how much you spent, right? Wrong. It is vital that you are always keeping your receipts for all business related expenses including travel, meals, and the like.
If you do not keep your receipts, you may run into trouble later on when you need to recall a specific purchase or you are asked about the deductions you are claiming.
Not Hiring Employees and Only Independent Contractors
Employees can be quite expensive when you start to think about payroll, taxes, insurance, workers’ compensation, and more. If you are thinking about hiring all independent contractors for your business, think again.
While it may seem profitable for you to do business this way, if you hire an independent contractor, you must treat him or her as such. That means you cannot tell them what hours to work and you cannot demand they work specifically in your office, etc. If you do, you will find that you receive a fine from the IRS.
If you want to be in control of when, where, and how your employees work, you will need to hire them on as employees who receive W-2s.
Payroll for Yourself
If you start out paying yourself $50,000 and then in a year or two your company does exceptionally well and you increase your payroll to $200,000 for the year, you may be fined by the IRS. It is not wise to compensate yourself so much and the IRS can deem the compensation as unreasonable.
In addition to fining you for the unreasonable compensation, you may also be fined if the IRS decides to consider the money a dividend.
The first time you file taxes for your small business, you may make a mistake or two on your tax return, which can cost you a hefty fine from the IRS, especially if you end up owing taxes to the government.
If you do not understand taxes or you are unsure of how to file yours, it is important that you speak with a professional tax agent to help you. He or she can tell you what the best way to file is and what documents you need.
Lastly, never share a checking account for your business and your personal spending. This can lead to trouble later on down the road when you have to differentiate between what was spent on your business and what was spent on personal items.
Patrick O'Hara, EA