A Small business owner has many things to manage, so it is common for them to make mistakes while filing their taxes. Mistakes in tax filing can result in expensive penalties that can affect the business.
Managing tax as a small business is important as well as difficult, especially if they do not have guidance from a professional accountant. It is important to understand these taxes and regulations to avoid making mistakes. Hiring a business accountant in Miami, FL, can help avoid such unwanted situations.
Whether you are a small business or a startup, you need to know and avoid common tax mistakes. Read this to learn about these mistakes and avoid them.
Table of Contents
Misclassifying Workers: Employees vs. Independent Contractors
It is important for any business to properly classify their workers. Any misclassification can result in tax penalties. This misclassification can make your tax filings incorrect.
Employee vs Contractor
The Internal Revenue Service basically gives guidelines on deciding if a worker is an employee or a contractor. One easy way to decide this is by checking if the work done by the worker is controlled by the business and then the worker is an employee. It is best to check the IRS guidelines regularly so that you can classify workers accurately.
Tax Implications
If you misclassify an employee as an independent contractor, then you fail to withhold taxes, which will lead to audits and huge back taxes.
One best practice to avoid misclassifying your employees is conducting a thorough review of all the roles of workers. Also, try using contacts that clearly tell the roles and responsibilities of the worker.
Overlooking Tax Deductions and Credits
The business owner sometimes misses out on tax deductions and credits that could have lowered their tax burden. It is important to check for any available deductions, but this requires careful record-keeping and knowledge about taxes. Some commonly missed deductions are:
Home Office Deduction
If you have been using a part of your home only for business, then you may qualify for this deduction. Expenses like rent, mortgage interest, and maintenance can be deducted, but this is only available for the percentage of your home that is being used for your business. Many small business owners miss this as they do not know what can be included in business expenses.
Startup Costs
Many businesses do not know that the cost of starting a startup, such as legal fees, accounting services, market research, and proportion expenses, are deductible.IRS allows startup a $5000 cost deduction. Keep a detailed record from day one to make sure you do not miss out on these savings.
How to Avoid Missing Deductions
To avoid missing deductions, you have to keep detailed records of all business expenses over time. It is important that you check for any updates in the IRS tax so that you are informed about any changes in deductible items. Consulting with a tax professional can make it easier for you to make sure that no deduction opportunity is missed,
Filing Incorrect Forms
Every business has specific tax filing requirements, and if you file a wrong form, then it can cause delay, penalty, or even audits. It is important that you fill out the right form that applies to your business.
Sole Proprietors
If you are a sole proprietor, then you will have to pay your taxes on your personal tax return by filing Form 1040 and Schedule C. This form basically reports profit or loss from the business, so keeping a record of your income and deduction tracking is important for the whole year.
Partnerships
Partnerships have to file Form 1065, which reports the business’s income, deductions, and credits. Partners are then given Schedule K-1 to report their share of the business’s income on their personal tax return.
Corporations
C-corporations have to fill out Form 1120 to report their income, and S-corporations also give each shareholder a Schedule K-1 to tell their share of the company’s income, losses, and deductions.
Consult a Tax Professional Today
Avoid making tax filing mistakes, which can result in penalties. Contact an experienced tax professional who can help you file taxes and maximize deductions accurately. Take control of your business’s financial future.
