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8 tax filing mistakes to avoid as a small business owner

Posted by Shivali Anand

September 17, 2021 | 6-minute read (1010 words)

Pile of American banknotes and Taxes written on white background

Taxes frequently take a second place for small businesses due to the continued need for client acquisition and sales. Many entrepreneurs wait until the last minute to worry about taxes. Others become bogged down in the tax filing process's complexity and inadvertently break tax laws.

Regardless of the circumstances, business owners who file late normally must pay a penalty, and it could even result in an IRS audit. Paying late or the incorrect amount also wastes money and effort.

Being mindful of typical blunders might help reduce the amount of stress you experience during tax season. Learn how to avoid eight common tax errors made by small business owners.

Using the incorrect business structure

This is one of the most common mistakes made by small company entrepreneurs. First-time entrepreneurs often make rushed decisions when choosing their company’s legal structure, usually because they lack a thorough grasp of the various business forms.

Too frequently, in a rush to get the business up and running, owners tick the box on the registration form that appears suitable at the moment but without fully understanding the tax responsibilities that accompany it. They only realize they've set up the entity wrongly when they attempt to file their taxes or seek a loan.

Tip: When it comes to selecting a business structure, be cautious. Investigate which one provides the best combination of legal protections and tax advantages in advance.

Not meeting deadlines

When you're running a small business, taxes aren't usually top of mind. Missing the deadline is an easy error to make when there are a million other things to accomplish. However, if you do not pay on time, your company is likely to face fines. S corporation and partnership reports submitted late when tax is owed, for example, are generally assessed a late-filing penalty of 5% per month, up to a maximum of 25% of your total tax bill, plus interest until the amount is paid off.

In rare circumstances, such as if you have a good reason for missing a deadline, you can ask the IRS for a tax-filing extension to allow you additional time and avoid fines. Even though it's a free service, it involves more paperwork than submitting a tax return.

Tip: To ensure that you file on time, mark important dates on your calendar and create early reminders.

Failure to pay estimated taxes during the year

If a small business owner expects to owe $1,000 or more in taxes when their return is submitted, the IRS requires them to make scheduled payments. However, many business owners despise paying these quarterly taxes throughout the year. But they risk incurring penalties as a result.

You may figure out your estimated taxes using Form 1040-E. However, make sure to account for all taxes you'll owe, including self-employment, Social Security and Medicare.

Tip: Maintain a separate bank account to keep track of your projected taxes. This will save you time and aggravation during tax season.

Inaccurate expenditure tracking

Small company entrepreneurs may find it challenging to keep track of their costs because they typically juggle many tasks at once. However, this is a squandered tax deduction opportunity. Maintain thorough records of your company costs, save every receipt, keep a daily mileage log and track and categorize each expense.

Tip: To keep track of your spending, consider adopting over-the-counter software or applications. Alternatively, hire a competent bookkeeper to maintain precise and up-to-date records of your company's costs.

Failing to claim the appropriate business deductions

Many small company owners fail to take advantage of key deductions and miss out on the potential to save money unless they have a thorough grasp of tax regulations. It's not unusual for small company owners to pay more in taxes than they owe.

As per the IRS, small businesses in the U.S. can deduct various expenses, including business meals, insurance, office furniture and supplies, travel expenses, advertising, licensing, startup costs and more. To reduce your tax payment, be proactive in tax preparation and determine which deductions your company qualifies for.

Tip: Determine the deductions your company qualifies for to reduce your tax bill by proactively preparing. Before you file, check the IRS website for a list of eligible company tax deductions.

Employees who are misclassified

You probably don't have an extensive list of workers as a small business owner. However, if a single person wears many hats, you may be uncertain of their actual job title and wrongly categorize them. This can have long-term and costly implications for your company, including high penalties, interest, and legal fees.

Tip: To stay in compliance, gain a thorough grasp of the IRS tax rules on employee categorization.

Combining business and personal expenditures

By combining personal and business spending, you risk creating a problem for your company that will be difficult to clean up come tax season. Keep your company spending in separate accounts and use separate credit cards. This will make it simpler to demonstrate the difference and keep track of deductible costs.

Tip: To simplify your company expenditures, pay yourself a salary instead of drawing from your business accounts.

Refusing to hire an accountant

As a small business owner with a restricted budget, it might be tempting for entrepreneurs to save money by doing their own business taxes using software or a mobile app. While this may work for single proprietorship with a simple business structure, it is not a wise idea if your firm is more sophisticated. You run the danger of completing your business tax return incorrectly and missing out on certain significant deductions simply because you don't know if your company qualifies.

Tip: Choose a CPA that has experience both in your sector and with tax planning.

Takeaway:

Though you may only have to file your business taxes once a year, the procedure is complicated and has ramifications throughout the year. Outsourcing tax services is one of the most effective methods to keep ahead of the tax season. Such a service can help you submit your return accurately and on time while optimizing your tax savings.

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8 tax filing mistakes to avoid as a small business owner

Using the incorrect business structure

Not meeting deadlines

Failure to pay estimated taxes during the year

Inaccurate expenditure tracking

Failing to claim the appropriate business deductions

Employees who are misclassified

Combining business and personal expenditures

Refusing to hire an accountant

Takeaway:

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