If you’re a business owner, then here are five of the most common tax mistakes that businesses often make, and you need to avoid:
Failure to send contractors 1099s
It’s common for business owners to remember to send tax filling forms to their employees, but what about their contractors? Contractors are vendors who sell services to your business. This includes the hiring of hired hands to help you to operate your business. This could also include retaining legal help (attorneys), housekeeping, landscaping, and other service providers.
The key is for you to keep in mind how much you’ve paid your vendor for the year. Have you paid them more than $600? If so, then they are responsible for reporting their earnings, and you are responsible for providing them with the IRS form 1099 so that they can report their earnings for the previous tax year.
You might not believe that you’ll need to do this if you pay your vendor directly from your bank account, instead of your payroll service. But if you fail to provide your contracted vendors with a 1099 form, then you could be looking at a maximum of $250 per form that you neglect to send.
Failing to pay quarterly taxes
In general, all businesses are required to pay quarterly taxes. The only exception is for sole proprietors. Technically, they too are required to pay their quarterlies, but legally, they can get away with paying once a year with their end-of-the-year taxes. However, this isn’t advisable, and here’s why:
It’s a lot easier for you as a business owner to divide your tax responsibilities through the year. Paying on a quarterly basis allows you to keep your tax debt manageable. In many cases, paying taxes once a year (if this is even an option for your business structure) sets you up for owing the IRS money. And this leads to a host of consequences that you want nothing to do with.
Co-mingling equipment and supply expenses
Here’s something that many business owners (especially small business owners) get wrong: They often co-mingle their operating equipment and their office supply expenses when they are filing tax deductions. Both category of expenses are deducible, but here’s the difference.
Your supplies are classified as products that you’ll use daily in support of business operations. These include things like paper, pens, paper clips, staplers, and things of this nature. These are highly-expendable items that you’ll use frequently, but you’ll also replenish these supplies on a frequent basis, too.
Then, there’s your equipment. This includes your computers, your copier machines, your telephones, your cash registers, and products of this nature. And yes, while it’s true that you’ll often use these products daily in support of your business, it’s also true that you’re not going to throw these away anytime soon. You’re going to keep your equipment for years to come. This also means that these aren’t going to be daily or weekly purchases.
This is why the IRS wants you to classify and separate the deductions you’ll take for your equipment from the deductions you’ll claim for your supplies. The easiest way to do this is to claim a deduction for the total price of your equipment, but you must claim the deduction within the tax year that you originally made the purchase. You could also amortize the value of your equipment over time, but using the first deduction method is a lot easier for you and for the IRS.
Not claiming your home office deduction
Many small business owners become confused about taking their entitled home office deduction. They can’t believe that they can actually claim a portion of their home (be it a house or an apartment) as a tax-deductible expense. But here’s the deal: The portion of their home that they are claiming must be an area that’s dedicated to the use of their business.
Dedicated business spaces include: A spare room, an office attachment to the house, a den, a wall where the business desk is located, or even, a portion of one’s kitchen where their business equipment is set up. An accountant can help to come up with the correct percentage that could be claimed for deductions. The accountant will also provide the business owner the correct financial figure that can be claimed, based upon the percentage that’s being claimed.
Hiring the wrong tax professional
The Tax Crisis Institutenotes that one of the greatest mistakes that you can make is hiring the wrong tax professional, and that’s even if you decide to hire a professional. Your cousin, your uncle, or your best friend might tell you that they can help you, but unless they’re a certified professional, then you could become entrapped into a financially dangerous situation.
Be sure to only hire a certified professional who wants to handle your taxes in an honorable manner. You have enough to contend with in running your business. Cleaning up tax filing mistakes isn’t a task you want to deal with.