We all make mistakes. But in the tax world, even the smallest mistake could cause a huge problem for your business. An error or problem with your tax return could mean late processing — which could result in a delayed refund — an IRS audit, or even filing penalties.
Business tax filing can be challenging, so remember not to rush through the process to avoid making mistakes. Patiently and diligently working on your taxes reduces the risk of minor errors that could turn into serious issues for your business.
Familiarize yourself with the following common tax filing mistakes so you can actively avoid them during the 2018 tax season.
1. Incorrectly Deducting Startup Costs
One of the most common mistakes is deducting the wrong costs, especially startup costs. A common misconception is that you can deduct all startup expenses from the first year of your business’ income. But unfortunately, this isn’t the case.
In reality, the costs of launching your business are generally deducted over the first 15 years of running your company. However, the IRS does allow for a deduction of $5,000 in startup costs and $5,000 in organizational costs during your first year of business, but only if your business expenses amount to less than $50,000.
2. Incorrectly Classifying Employees
If you’re more than a one-person-band, you should be wary of misclassifying your employees. Many businesses choose to hire independent contractors to help them with specific projects or specialized work. But unfortunately, contractors and employees often get mixed up and incorrectly labeled when it comes time for tax season.
If your company’s independent contractors engage in an employee-employer relationship with you, they may qualify as standard employees, and this needs to be reflected on your taxes. It is also important to not misclassify your regular employees as independent contractors because doing so could cause them to miss out on important benefits.
For tax purposes, there’s a big difference between employees and independent contractors. Your business will not withhold taxes from legitimate independent contractors — they are responsible for filing their own taxes — but will withhold employee tax and income tax for your employees.
3. Mixing Personal and Business Finances
Mixing personal and business expenses is a red flag to the IRS. It is advised that you don’t deduct any expenses that aren’t considered business expenses. For instance, items like client dinners and your commute won’t always be deductible.
It’s important to only deduct actual business expenses because trying to pass off personal costs as business costs could land you in hot water. Keeping these two separate will also make it easier for you to manage your tax bills and navigate an IRS audit (if it comes to pass).
On the flip side, there could be deductions that you’re missing out on when you are filing your business taxes. Let an experienced tax attorney help you identify any deductions that you may not be considering to help maximize your deductions.
4. Misunderstanding Business Tax Obligations
Beyond classifying employees correctly, you’ll also want to report items properly for your business taxes. Typically, these include payroll and employer taxes, split into employer-paid taxes and withholding amounts.
Your employer-paid taxes include things like the state and federal unemployment insurance you invest in for your employees and the support you offer for Medicare and social security. On the other hand, withholding amounts refer to the money you deduct from employee workers to pay for social security, income taxes, and other “FICA” expenses. The IRS is growing increasingly less forgiving of small businesses who make mistakes on their payroll taxes, so it’s important to be sure you know exactly what you need to deduct each year.
5. Filing Late, or Not Paying on Time
Taxes can be a seriously daunting process and exceptionally time consuming. With your business to juggle, it’s easy to lose track of dates and miss your tax deadline. Fortunately, you’re not alone: many business owners struggle with filing their taxes on time. Employing a professional accountant could help you get a handle on your taxes, especially if you bring them in at the beginning of the process.
Remember, there are two penalties connected to lateness with tax returns. The first penalty is for failure to file, and the second is for failure to pay. The IRS advises filing your tax returns if they’re due, regardless of whether you have the money to pay.
Filing your taxes is complicated, but it doesn’t have to be a nightmare. If you’re concerned that you’ve been guilty of any of these mistakes, or you simply need advice, contact Milikowsky today. Our professional tax lawyers can help you to get your business back on track.