Top 6 Small Business Tax Mistakes (And How to Avoid Them)
Federal tax evasion is a serious crime. Even a simple honest mistake that doesn’t necessarily fall under the category of evasion can never be excused. Once the IRS gets a whiff of it, you’re in serious trouble. Like a $250,000 fine or 5 years of imprisonment kind of trouble.
Don’t worry because you can avoid such punishments. Just keep on reading to find what these common mistakes are and how to avoid making them.
1. Misreporting your income
Monetary earnings other than wages, salaries, and tips are to be reported via various 1099 forms. That means small business profits are to be filled in a 1099 form which is then recorded into the IRS’s computer.
You’ll receive a lot of 1099 forms. Depending on what income you’re declaring, there is a corresponding 1099 form for that. The 1099-S form is for your investments, the 1099-R form is for your retirement, and the 1099-MISC form is for small businesses.
A lot of small business owners make the mistake of declaring their small business earnings through the wrong 1099 form. Listing the wrong income tax in the wrong form could lead you to some pesky IRS scrutiny.
Avoid it by knowing the various 1099 forms, fill up, and file the one required for your small business.
2. Failing to report ALL of your income
Underreporting is very tempting once you start your own business and it is the most common tax mistake. Some do it intentionally by making offshore accounts and use cryptocurrencies like Bitcoin to launder money or evade taxes.
Others just fail to report all of their income because they didn’t keep receipts. It doesn’t matter anyway, at the end of the day, nobody can escape the IRS. Keep all the receipts of your expenses and transactions. Then declare everything. Stay honest.
3. Overreporting all your income
There is a difference between gross income and net income. Gross income is how much you’ve made and net income is how much you take home with you after deductions were taken from your gross profits.
There are 4 reasons people over-report their income: One, to increase social security credits. Two, a misplaced sense of charity. Three, by bragging. Four, overreporting by mistake because they don’t know the difference between gross and net income.
Whichever the real reason is, it’s still a felony - perjury to be exact. When declaring your income tax, be as accurate as possible.
4. Not filing and paying taxes on time
The penalty for the late filing of business taxes is assessed at 5% per month. It will continue to increase until the return is filed. A late payment penalty is worse with a 6% interest plus an increasing .5% each month after the April deadline.
Mark your calendar for tax filing and payment time so you’ll never forget to pay troublesome amounts of penalties.
5. Not paying estimated taxes during the year
Just when you thought that yearly taxes were annoying enough, you still have an estimated tax to pay. This tax is a mandatory prepayment for all entrepreneurs like sole-proprietors and self-employed individuals who estimate to owe $1,000 and more when they file their return.
Hire an accountant to determine if you’re about to owe the IRS $1,000 especially if your small business is growing rapidly.
6. Not applying the right business deductions
Tax evasion and money laundering aren’t the correct paths to take if you don’t want to pay less than what you actually owe in your taxes. There is this thing that a lot of businesspeople forget or don’t know. It’s called business deductions and qualifying for them isn’t mandatory. You still need them though.
Advertising, licenses, equipment, start-up expenses, office furniture, and supplies, are some of the expenses that can help you qualify for deductions. Just remember to keep receipts of everything you buy for the business.
Paying tax is hard. You need to sum up all your expenses to compute how much you owe the government. Trying to handle everything about your business will only cause you stress and lead to more costly errors. I recommend that you keep all your receipts and delegate work by hiring an accountant. They’ll do the job of bookkeeping, taking care of your tax computations, and find ways to qualify for deductions to the IRS.
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