You may or may not be surprised by the amount of mistakes that business owners make on a regular basis when it comes to their taxes.
And maybe you are making one or more of these mistakes as well.
Mistakes with your business money and your taxes can cost your business quite a bit of money, and it’s usually money you don’t have.
Make sure you aren’t doing any of these mistakes in your business. And if you are, let’s get them fixed as soon as possible.
Mistake #1: Not reporting all of the information that is provided to you
Some of the businesses that you work with will send you a 1099. You may also get 1099-INT (just an entity, usually a bank, saying you were paid interest). Also IRA withdrawals and HSA withdrawals.
Any form that you receive as a tax document needs to be reported on your tax return.
The IRS knows if you don’t report it because when the forms are sent you, the sender is also sending a copy to the IRS.
You reporting it on your tax return is verifying the information the IRS already has about you. So just make sure that you report all of the information that is provided to you.
Mistake #2: Not keeping good records or waiting to get your records organized
You are a busy business owner. You have a lot going on in your business and those things are much more important than making sure your bookkeeping is done and you have all of the appropriate records available to you for your recordkeeping.
I get it, recordkeeping and bookkeeping really aren’t your zone of genius. It’s just annoying to you and you could be making more money by doing something else.
You either need to find a bookkeeper to help you with the work, or just find a way to get it done yourself.
It’s also very important that you keep copies of all of your business records (i.e. sales and expense receipts). Not having these records will make sure that if you get audited, you will not get credit for the expenses.
Mistake #3: Over or under reporting your income
Over reporting your income doesn’t happen all that often, but it does happen.
Over reporting tends to happen when you get 1099s from your clients and don’t subtract the income on the 1099 from your total income that you are reporting that wasn’t received on a 1099. This is the most common form of over reporting.
Under reporting income, though, is very common.
I get it, you don’t want a huge tax bill. So to get around that, you under report some income.
You’re just much better off not doing it. You’ll get caught. And have some decent fines and fees and additional taxes to go along with it.
I can’t even begin to tell you how many audits I conducted on clients that were underreporting their income. The government knows when you are underreporting.
Mistake #4: Not claiming the home office deduction
No, you are not required to claim the home office deduction. Also, you can’t claim the home office deduction if you have a corporation or your income is actually a loss for the year.
But this deduction is a very good deduction that can help you reduce your income. But at the same time, you do not want to report the items that go into the home office deduction as business expenses. This way, you are then double dipping into the deduction, which will be discovered.
Mistake #5: Not tracking and claiming the mileage deduction
In order to claim the mileage deduction, the mileage that is being claimed must be driven for business purposes. You’ll also need to know how much you drove total for the year to get a rate that is split between business and personal use.
Many people don’t like the hassle of doing the work for this deduction so it doesn’t get used. But there are easy apps that you can use to track your mileage. You’ll just have to remember to use them when you drive.
This is another deduction that can actually add up to a nice chunk of change to help you reduce your taxable income.
But you also need to be careful that you don’t also claim deductions for vehicle expenses. On your tax return, you get one or the other - the vehicle expenses or the mileage.
Mistake #6: Misclassifying workers
There are a lot of businesses that classify employees as independent contractors. They do this because they don’t want the hassle of having to deal with employee taxes. But honestly they will run into a lot more problems from both their state and federal government if they keep misclassifying their employees.
Back before I graduated college, I worked for 2 different companies who classified me as an independent contractor and paid me through a 1099, instead of a paycheck. But I was actually an employee because I worked out of their office and used all of their equipment, therefore I was an employee.
Misclassifying workers is going to be more of a pain and more costly than if you just classify them correctly and pay the taxes.
If you need assistance with the payroll, then you’ll want to find someone to help you with it. It will still cost you less than if you misclassify your workers and get caught.
Mistake #7: Not filing your return on time
Even if you can’t pay the amount of tax due with your return, you still need to either file the return by the due date or file an extension on your return.
When you owe money with your tax return, the penalties are greater if you don’t file your return on time. So just make sure you file it on time.
If some of the people that you worked with over the past year filed 1099’s for you, then the IRS knows you made money. And if you do not file your tax return, they will send you a bill stating that you owe tax on the whole amount that was reported on the 1099’s without giving you deductions for expenses.
Just make sure you file your tax return on time (or file the extension). You’ll have a lot less of a headache this way.
Mistake #8: Using the wrong professional to help you
It is very possible to use the wrong professional to help you with your bookkeeping and your taxes.
You need to make sure that you are working with someone who understands your business, and especially someone who understands online business.
Also when you hire someone to help you with bookkeeping, make sure they are someone who understands bookkeeping, your business and everything that actually needs to be done for your business.
There are accountants out there that do not understand online business and some will tell you that they don’t understand online business, you’ll have to find someone else. Do your research. Find the right person who can actually help you in your business.
Mistake #9: Choosing the wrong form of business
There are 4 main types of legal structures for your business:
- Sole proprietor
- S Corporation
- C Corporation
When you start your business without filing any paperwork, you are automatically a sole proprietor. The other 3 types of business structures mean you have to file paperwork with your state and usually pay a fee, most of the time this is an annual fee.
You will need to sit down with a professional, accountant and/or lawyer, to explain your business and make sure you are using the correct business legal structure for your business.
Just because someone in a facebook group or other social media platform says they are operating as a certain business structure doesn’t mean that you should follow suit. It may not pertain to you or your type of business.
Do research and talk to a professional who can take some time to understand your business.
Mistake #10: Not making estimated tax payments
Estimated tax payments are just a part of being in business. These payments are also why you should be setting aside money in your business every time you make a sale.
You will be charged penalties when you file your tax return if you don’t make estimated tax payments. (Effective for 2020, if you paid at least 85% of the total tax due with estimated tax payments, the fees will be waived by the IRS.)
These payments are made quarterly. They are either 110% of the total tax that you paid in the prior tax year divided evenly over 4 quarters, or you calculate the payment based off your actual income each quarter.
Mistake #11: Not taking all the deductions and tax benefits that your business is entitled to
Yes, there are people that decide not to take all of the deductions that their business is entitled to.
Purchases that you happen to pay for with your personal bank account or even cash. You either forget that you made these purchases, or you don’t want to deal with the hassle of putting this in your bookkeeping software.
Or the home office deduction. You don’t want to do the work to get the home office deduction. I have a home office deduction calculator that you can get with my Painfree Tax Prep course.
Or the mileage deduction. Again, you don’t want to do the work, or you forget to track your mileage every time you drive somewhere for your business.
You may think these deductions aren’t going to add up to much, so you easily forgo them. But they really can add up to quite a bit and can be quite helpful when you are filing your tax return.
Mistake #12: Mixing personal and business expenses
Personal expenses are not business expenses, no matter what. You may think certain personal expenses (like clothing and makeup, even just for a photo shoot) are business expenses, but I’ll be the bearer of bad news here, they aren’t.
Make sure you get separate bank accounts. Keep the personal purchases to your personal bank account and the business purchases to your business bank account.
If you have a personal expense that you really want your business to pay for, then you need to issue yourself a paycheck from your business.
Mistake #13: Not utilizing retirement plans
Retirement plans are an easy way to reduce your taxable income in your business. And with you as the business owner, you get to choose how much of your retirement plan is paid by the business and how much is paid out of your paycheck.
Hint: Most business owners choose that business pays for 100% of the plan.
Remember those days working for corporate and you had to pay 50% or more of your plans, while your corporate job only contributed 50% or less of the plan?
Now you get to choose how much the business contributes. And the contribution is a business expense that reduces your taxable income.
Mistake #14: Not understanding the differences in the federal and state tax rules
Not all of the rules are different between the state and federal. But you still need to know where the differences lie.
The biggest difference is usually in the meals and entertainment deduction. (Keep in mind that the entertainment part of this deduction has disappeared effective for 2020 tax filings.)
Some states will allow you to deduct the full meal cost, whereas for federal you are only allowed to deduct 50%.
No matter what, it is your responsibility as the business owner to know what laws and regulations affect your business (or find a professional to work with you to make sure you are working with all of the right laws and regulations).
Mistake #15: Thinking you can do it all on your own
As an entrepreneur, it’s easy to fall into the trap of thinking that you can always do everything in your business on your own.
And maybe you really can.
But there are 2 areas of your business that you really should try to find additional help even if you really do think you can do it all on your own: money and legal.
These 2 areas are very, very complex. Even the professionals have to spend time doing research to make sure they are applying all of the right laws and regulations for your business when you work with them.
Stop trying to think you are Superwoman/Superman in your business. Get the help that you actually need to help you move your business forward even more.
Tax Mistakes can Cost Your Business
Mistakes with your taxes can cost your business a lot. And you absolutely love your business.
Don’t let any of these mistakes stop you from having that successful business you have always dreamed of.
Get the help and support that you need in your business and get your recordkeeping up to date.
And as always, make sure that you are following all of the rules and regulations that actually affect your business. There are so many laws and regulations out there. And so many business owners are not in compliance with these laws and regulations simply because of lack of education.
Don’t make these mistakes. Either do the research yourself to make sure your business is up-to-date with the right laws and regulations or find someone to work with you to keep you up-to-date with everything that affects your business.
All information on this site is provided for general education purposes only and may not reflect recent changes in federal or state laws. It is not intended to be relied upon as legal, accounting, or tax advice. We strongly encourage you to always consult with a tax or accounting professional about your specific situation before taking any action. Please read our full disclaimer regarding this topic.
Make your tax prep easier this year with Painfree Tax Prep! You'll learn all the important things to prepare your business for taxes this year and be able to easily hand over your records to your tax preparer with little stress.
With Painfree Tax Prep, you get:
- Workshop explaining all the things you need to know to easily prepare for your taxes
- Estimated Tax Payment explanation
- Masterclass on 1099's
- Masterclass on Business Legal Structures
- The Tax Prep Power Pack
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