9 common small business tax mistakes you need to know about

In this 5-minute read:

  • Common business tax mistakes
  • How to avoid small business tax errors

Not many people enjoy doing taxes, especially when slammed running a small business. But it’s an important and unavoidable business task that can have huge consequences, so it deserves extra caution and care. 

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Taxes are an easy thing to put on the backburner as you try to keep your business running, however, there are things you should be doing regularly to ensure that you have a good tax season. 

Avoid making these common tax mistakes in your small business to keep business going strong and the stress low when tax season comes around. 

Not keeping good records

One of the biggest mistakes that you can make on your taxes as a small business owner is not keeping accurate and complete records. Without good records, you won’t be able to properly prepare your taxes and might even miss some big write-offs. 

organized files for small business tax mistakes

Save all receipts for purchases, expenses, and sales, and categorize and organize them properly. Consider electronic backups, and forward ecommerce purchase receipts to a cloud-based email account to make sure everything is backed up.

Along with keeping good financial records, it’s vital to separate your personal and business expenses. Using a separate credit card and bank account from your personal accounts for your business will help you to keep better records of business expenses.

Not understanding your tax obligations as a small business owner

As a business owner, you should understand your obligations for taxes. A lack of understanding in this area can be risky and cause serious problems for your business. 

Take some time to read some basic how-to books on the subject and gain a fundamental understanding of your obligations with taxes as a small business owner to ensure that you can do your part. 

Meet with a tax professional at least annually to stay up to date on the latest laws and to understand any future tax obligations, which brings us to our next point. 

Not using a tax professional

Unless your profession is accounting or related to it, you should be using a professional to help you manage your books, or at the very least to consult your business regarding your taxes. 

Your expertise is in your business, not taxes, so make sure to invest in a business tax specialist that can help you out. 

couple meeting with professional tax preparer for small business

Some things to watch out for in a tax professional:

  • Don’t hire someone who gives shady advice like recommending you hide income or take write-offs that you don’t qualify for
  • Make sure the person you hire is knowledgeable in tax laws, retirement plans, etc.

Talk to a few different accountants to make sure you hire the right person for your business. 

Go deeper: 5 things to discuss with your CPA about the new tax bill

Filing employee incomes incorrectly

When you hire employees, you have a new set of rules to follow when it comes to taxes. This is where keeping track of everything (and making sure it’s all correct) will help you. 

Every number needs to be exact when you are reporting your employees’ wages and benefits on your tax returns. 

You also need to discern what type of employees you’ve hired, whether they are independent contractors or regular in-house employees, and what forms you have on file for them. 

Again, a professional business tax accountant is a huge help here.

Missing out on key deductions

Legitimate business deductions lower the amount of income you have to pay taxes on and can lead to huge savings every year. 

It’s important to keep good track of everything that might qualify as a business tax deduction. Don’t get stuck paying more taxes by missing out on big deductions. 

Most expenses that you incur for your business can be deducted from your taxable income. If you’re not sure if an expense can be deducted, track it and file it anyway, and let your tax preparer determine whether it’s a legitimate item.

Some common expenses that can be deducted:

  • Vehicle expenses
  • Employee wages
  • Contracted labor
  • Supplies (cleaning, office, food, etc.)
  • Rent for business property
  • Utilities
  • Insurances
  • Repairs
  • Travel expenses
  • Advertising expenses
  • Legal fees
  • Home office expenses
  • Meals
  • Equipment rentals/purchases

These are only a few of the things that you can have deducted from your taxes. One thing to keep in mind though, with some of these items, is that you can only deduct a certain percentage of your expenses. So be sure to consult with your tax pro to learn what those are and how to estimate any limitations when keeping your records. 

Check out this related article: 6 last minute tax tips to help small businesses avoid overpaying Uncle Sam

Filing taxes too late

Filing and paying taxes too late is one of the most critical mistakes you should avoid. Simply filing on time can save hundreds or even thousands of dollars in penalties and interest.

If you’re consistently having trouble getting your taxes filed on time, you might meet with a tax counselor who can help you streamline your records-keeping and processes.

alarm clock says it's time to file small business taxes

You should work to be punctual with your taxes, even if you are able to file for an extension with a minimal fee.  

The next step can also help ensure that you have the money you need to pay your taxes on time. 

Failing to pay estimated tax payments quarterly

Every quarter, you should be setting aside your estimated tax payments to ensure that you have the money you are supposed to pay when tax season rolls around. If you don’t do this, you are at risk of sending in a late payment or not having the proper funds to cover what you owe in taxes. 

You don’t have to just set aside your estimated taxes, you can actually pay it directly to the IRS every quarter so you don’t tempt yourself to spend the money and risk not having it later. 

Forgetting carryovers 

Depending on your income, you may have certain limitations on the amount of deductions you can take on your taxes in a year even if you are fully eligible for those deductibles. 

A tax carryover, or carryforward, allows you to apply the unused part of an eligible deductible on a future year’s tax return. 

If you have some carryovers from a previous year, be sure to apply them to this year’s return. Consult your tax pro to set this up properly. 

Making business decisions for tax impact

If you’re making a large purchase solely based on the tax implications that it has for your business, it’s probably not a smart business decision. 

Whenever you make a large purchase for your business, first ask yourself if it is going to increase your profitability. If the answer is no, then it’s probably not the wisest choice. 

Keep these tips in mind and make sure you have a good team to help you keep good records along the way, and you will have a better experience when it’s time to file your business tax return.

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