Making tax prep mistakes isn’t uncommon for small business owners. Many of these mistakes occur because many small business owners only think about their taxes in the weeks leading up to Tax Day. However, staying on top of your taxes is a year-round process that requires planning, preparation, and intentionality.
Nobody wants to make mistakes when it comes to filing and paying their taxes. So read through these seven common tax prep mistakes small business owners make so that you can be sure to avoid making them in your business.
1. Not filing or paying taxes on time
This is quite possibly the most easily avoidable tax prep mistake that business owners make. The deadline for filing and paying your taxes remains the same each year, April 15 (unless that date falls on a weekend). So make a plan to have everything you need completed in order to file and pay your taxes on time.
The IRS imposes stiff penalties for failing to file or pay your taxes on time. It’s critical that you file and pay your taxes on time so that you don’t have to pay the unnecessary and avoidable penalties. If you have questions about what the penalties are, you can find more information on the IRS Website.
If you’re unable to file on time for any reason, be sure to file for an extension. The more complex your business taxes are, the more likely you’ll need to file for an extension. But don’t use this as an excuse to procrastinate!
2. Not separating business and personal finances
By mixing your personal and business finances, you are creating a big mess for yourself that will have to be cleaned up when it’s time to prepare your taxes. It’s never a good idea to mix your business and personal finances and is extremely important for you to separate the two.
In order to keep your business and personal finances separate, maintain (and actually use!) separate bank and credit card accounts. Keep your receipts separated. And pay yourself a salary instead of directly withdrawing from your business account as you need it.
If you need guidance on keeping these finances separate, talk with your bookkeeper or accountant.
3. Not applying the right business deductions
Applying business deductions are a great way to cut down your tax bill and help you not pay more than what you actually owe. There are numerous business deductions that you may qualify for, such as office furniture, office supplies, advertising, start-up costs, and more. Don’t make the tax prep mistake of failing to make deductions! Make sure to learn what you can deduct so you can cut back what you owe.
For more information on common business deductions, you can review IRS Publication 535.
4. Not paying estimated taxes throughout the year
According to the IRS, businesses and business owners are generally required make tax payments throughout the year. If you are filing as a sole proprietor, partner, S corporation shareholder, and/or self-employed individual, you will need to make estimated tax payments throughout the year if you expect to owe more than $1,000 when you file your return. If you are filing as a corporation, you will make estimated tax payments if you expect to owe $500 or more in taxes.
There are a couple of ways to estimate your payments throughout the year. First, your bookkeeper or accountant can advise you on the amount you should be submitting for your estimated tax payments. Second, individuals can calculate how much you owe with the Form 1040-ES worksheet.
Being prepared to stay on top of your estimated tax payments throughout the year will help you to avoid this potentially costly tax prep mistake.
5. Not doing any tax planning
One way to avoid making major tax prep mistakes is to work with a tax professional throughout the year who can help you with tax planning. At the very least, they can help you avoid a surprisingly large tax bill that you did not expect.
Think of this tax professional as a coach who’s trying to help you win. They can guide and advise you throughout the year, which comes with many benefits. Working with a tax professional regularly can help to reduce your stress during tax time. It also can help you to file early instead of having to rely on extensions to get everything done. Best of all, engaging in this proactive tax planning can help you lower your tax liability.
6. Not understanding the difference between federal and state tax rules
As a business owner, it’s important that you’re up to date on both federal and state tax rules. Federal rules apply to every person and every business, no matter the state you’re in. However, each state has its own set of rules which come with its own set of quirks. Some states have generous tax breaks while other states are more limited. Make sure that you plan your taxes with both federal and state rules in mind.
7. Not using an accountant
While it may be tempting to save yourself a few dollars by preparing and filing your taxes yourself using a business tax software, this is not a good idea for businesses – especially those with a complex setup. By preparing your own taxes, you run the risk of misfiling or missing some major deductions because you didn’t know you qualified for them.
While actually filing your taxes only comes once a year, there are year-round tasks, requirements, and payments that are a part of the the tax process that will have implications for your business all year long. Having a qualified accountant on your team is a great way to set yourself up for success when it comes to avoiding tax prep mistakes.
When choosing an accountant, be sure that they have expertise and experience in your industry as well as with tax planning. At Anne Napolitano Consulting, Inc., our team is made up highly-qualified accountants with expertise and experience in a variety of industries. Reach out to us to discuss how we can join your team and benefit your business.
