5 Mistakes You Should Avoid This Tax Season
Nothing in this article constitutes legal or tax advice. Please consult a professional if you have questions.
When you’re a small business owner, every dollar counts. It’s critical to manage your cash flow carefully and watch your expenses closely to ensure you’re operating with a healthy profit margin. But despite being cash conscious, when it comes to taxes, many small business owners make mistakes that can cost them a lot of money.
To make sure you’re not leaving money on the table, here are five common tax mistakes small business owners make and what you should do to avoid them.
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They don’t plan ahead.
When a deadline is months in the future, it’s easy to procrastinate. Perhaps that’s why one in four small businesses don’t think about tax season until it’s one to two months away. However, if you’re not keeping track of your accounting throughout the year, you can miss out on deductions. Not only that, but you’re more likely to be overwhelmed once tax time rolls around. To play it safe, don’t think of tax day as a “once a year” event; record your business expenses daily and keep track of your receipts throughout the year.
They go it alone.
In a recent survey by QuickBooks Payroll, 48 percent of small business owners said taxes are their biggest challenge. It’s interesting, though, that nearly 40 percent of small business owners said they don’t use an accountant for taxes. There’s no question taxes can be stressful, but using a professional accountant can ease stress by saving you time and money. While they sort through your financial records, you can focus on your business. And since they’re experts, they may uncover credits or deductions that you might not realize on your own.
They miss out on deductions.
While one in three owners admit they could make better use of tax deductions, it’s surprising that one in ten don’t use tax deductions at all. Some business owners miss out due to poor recordkeeping, but others may skip out on deductions due to fear of an audit. To make sure you maximize your deductions, you need to keep diligent records, but as mentioned above, you’re best off using a tax professional. They can walk you through your expenses to ensure you find the tax benefits you’re entitled to.
They get behind on quarterly estimated payments.
Some business owners make the mistake of forgetting about quarterly estimated tax payments, or think they’re optional. However, if you’re a sole proprietor, partner, or S corporation shareholder, you’re generally required to make estimated tax payments if you expect to owe $1,000 or more in taxes. If you’re a corporation, you typically have to make estimated tax payments if you expect to owe at least $500 in taxes.
If you get behind in estimated tax payments, it can be extremely hard to catch up and you may be subject to penalties. To figure out what you owe in estimated payments, use the Form 1040-ES worksheet. And to make sure you stay on track, set up a separate account for taxes and put money aside for quarterly payments as soon as you receive it.
They don’t file on time.
This is the ultimate blunder and, without doubt, the most expensive of all the tax mistakes you can make. If you fail to file your taxes on time,even with an extension, you can face penalties and fees that add up quickly. And if you don’t pay your taxes on time, you’re subject to even more significant fees and interest.
To avoid this situation, keep up on your quarterly estimated payments. By paying those at a regular cadence throughout the year, you can manage your budget so you’re not stuck with one lump sum and unmanageable fees at tax time.
Lower your tax bill.
By avoiding these common mistakes and making sure you’re prepared, you can eliminate some of the stress associated with tax season and, more important, lower your tax bill. If you start with best practices now, you can potentially save money this year and into the future.
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