Highlights
- The daily grind of running a small business can be overwhelming, leaving little time for small business owners to focus on tax compliance.
- Common tax mistakes include underpaying estimated taxes, missing tax deadlines, and misclassifying employees.
- At QBS, we take the hassle out of tax reporting and keep your business fully compliant with customized HR solutions. Struggling with taxes? Contact us to get started!
Tax season can feel like an obstacle course for small and mid-sized businesses (SMBs). Between the hustle and bustle of daily operations, tax compliance can easily get pushed to the back burner. But neglecting your tax obligations can lead to costly tax mistakes, like penalties, audits, and even interest charges.
Read on to uncover some of the most common tax errors that small business owners make and get practical advice on how to avoid them.
Let’s jump right in!
Underpaying Estimated Taxes
Estimated taxes are a common source of frustration and, unfortunately, mistakes for many small business owners.
Small business owners are required to pay estimated taxes when they expect to owe $1,000+ upon filing their annual tax return.
However, fluctuating income throughout the year makes it challenging to predict tax liability for small businesses. This uncertainty can lead to errors in estimating the amount of taxes owed and can result in underpayment or overpayment of estimated taxes.
The penalty for underpaying estimated taxes can be significant, ranging from a small percentage to a hefty chunk of your tax liability. This, coupled with interest charges, can seriously impact on your business’s bottom line.
How to avoid this:
- Track your income and expenses meticulously. This will help you make more accurate estimates throughout the year.
- Partner with a tax specialist. Simplify tax management by engaging with qualified tax professionals who analyze your business’s specific income and expenses to ensure accurate estimates throughout the year. Experts can also guide you on maximizing deductions and credits, potentially reducing your overall tax burden.
- Consider using tax software. Many software programs can help you calculate and track your estimated tax payments.
Missing Deadlines
As with personal taxes, if a business owner files their business tax return late, they can be subject to a penalty.
Missing tax filing deadlines can lead to significant penalties and interest charges. Penalties can be a percentage of the unpaid tax or a flat fee, and they can accrue quickly. Also, late filings can raise red flags with the tax authorities and increase your chances of getting audited.
Businesses must stay informed about filing deadlines for various tax forms, including income tax returns, payroll taxes, sales taxes, and quarterly estimated tax payments.
This can help you avoid missing tax deadlines:
- Mark your calendar: Clearly mark all important tax deadlines on your calendar well in advance. Set reminders or consider using a tax software program with built-in deadline alerts.
- Gather documents early: Start collecting and organizing your tax documents —such as receipts, invoices, and bank statements— throughout the year. This makes the filing process smoother and avoids last-minute scrambling.
- File for an extension (if needed): If unforeseen circumstances prevent you from meeting a deadline, consider filing for an extension. An extension gives you more time to file your tax return, but it doesn’t extend the deadline for paying any taxes owed. Remember, it’s always better to file an extension and pay any taxes due on time than to miss the deadline altogether.
Mixing Personal and Business Expenses
For many small business owners, the line between work and personal life can get blurry. This can be especially true for those who operate out of a home office or use their vehicle for business errands. A common consequence of this blurred line is mixing personal and business expenses, which can lead to tax trouble down the road.
To avoid confusion between valid business expenses from personal expenses and ensure the accuracy of deductions, business owners should file their personal and business tax returns separately. This can assist in preventing audits and errors.
Here’s how you can keep your finances separate:
- Dedicated business accounts: Open separate bank accounts for your business. This makes tracking business income and expenses significantly easier.
- Track everything: Develop a system for tracking all your business expenses, whether it’s a receipt collection app, a designated folder, or a dedicated spreadsheet. The key is to have a clear record of what was spent and for what business purpose.
- Set spending limits: Establish clear policies for reimbursing personal expenses used for business purposes (e.g., mileage for using your car for business errands). This ensures consistency and avoids confusion during tax season.
Failing to Keep Accurate Records
Many businesses struggle with maintaining thorough and organized financial records throughout the year. While it may seem like a minor oversight, neglecting good record-keeping practices can have serious consequences for your business’s financial health.
The IRS requires businesses to maintain accurate records of income, expenses, and assets. These records are essential for supporting the deductions and credits you claim on your tax return. Without proper documentation, the IRS may disallow your deductions, leading to a higher tax bill.
Meticulous records are also crucial in the event of an audit, as they allow you to demonstrate the legitimacy of your business expenses and income.
Finally, having a clear picture of your business’s income and expenses helps you make informed financial decisions, track your profitability, and identify areas for potential cost savings.
How to avoid this mistake:
- Choose a system: There’s no one-size-fits-all approach. Decide what works best for your business, whether it’s a simple spreadsheet, accounting software, or a combination of both.
- Categorize everything: Develop a system for categorizing your income and expenses. This makes it easier to track specific types of costs and identify potential tax deductions.
- Digitalize when possible: Scan receipts, invoices, and other documents to create a digital archive. This not only saves physical space but also makes it easier to access and search your records electronically.
Misclassifying Workers
Many small businesses rely on a mix of full-time employees and independent contractors. However, there’s a crucial distinction between the two that has significant tax implications. Misclassifying an employee as an independent contractor (IC) is a common tax mistake that can lead to hefty penalties and unexpected tax burdens.
How to avoid misclassification:
- Understand the criteria for classification. Take the time to familiarize yourself with the criteria used by the IRS to classify workers as employees or independent contractors. Key factors include the level of control over the work performed, the degree of independence of the worker, the method of payment, and the presence of a written contract.
- Document worker relationships: Maintain detailed records and documentation of the working relationships with individuals providing services to your business, such as contracts, invoices, or job descriptions outlining work responsibilities.
- Seek professional guidance. Worker classification can get intricate, especially with evolving regulations. By hiring tax reporting services, you can have your specific business model and worker relationships analyzed and get in-depth guidance to ensure you’re classifying workers correctly based on current tax laws.
Managing taxes can be a real burden, and even the smallest mistakes can have a big impact on your business’s bottom line.
Investing in a reputable tax preparer or tax management company such as QBS can give you the support you need in filing your business taxes. From quarterly state and federal reporting to withholding and unemployment management, QBS offers comprehensive solutions for tax reporting and tax management for businesses of all sizes.
We understand how complex taxes can be, so we value your investment and trust in us to assist you in minimizing your liabilities and maximizing your savings. Contact QBS today to jumpstart your tax season with confidence!
