It has been said that “to err is human.” However, small business owners who want to demonstrate their humanity are strongly cautioned against making any of these five common and costly tax filing mistakes:
- Failing to report income from all sources, right down to the last cent.
The IRS knows that mistakes can happen when it comes to reporting income from all sources; especially for freelancers who may have dozens or hundreds of active clients. But there is a key distinction between relatively minor mistakes (which are usually fine) and egregious blunders due to careless or negligence (which are not).
- Failing to file or submit the proper forms.
Depending on the business structure (e.g. sole proprietor, LLC, etc.), businesses need to file certain forms by specific dates. Failure to do so will result in penalties, and in some cases it can trigger a re-assessment or an audit.
- Mixing personal and business expenses.
The onus is on business owners to identify and organize personal expenses (e.g. going to the movies and buying video games) from business expenses (e.g. leasing office space and purchasing unified communications solutions). The simplest and safest way to do this is to have separate bank accounts and credit cards for personal vs. business use. It’s also important to clearly identify the business-use portion of items or costs that are also used for personal needs or enjoyment (e.g. using a vehicle for both private and commercial needs).
- Misclassifying workers as independent contractors instead of employees.
Some small business owners believe that the workers they hire can decide whether they wish to be classified as employees or independent contractors (the latter option providing certain tax advantages). However, this is not the case at all. Worker classification is based on a number of factors, including where, when, and how they work, and if they are managed/supervised. Errors can lead to prolonged payroll audits and a steep overdue tax bill that includes plenty of interest (and interest on top of interest).
Failing to take advantage of all applicable deductions.
Tax evasion is illegal. Tax avoidance is not. Each year, a surprising number of small business owners fail to avoid paying as little tax as (legally) possible. Is it because they want to give Uncle Sam and his relatives at the state and local levels a helping hand? No. It’s because they aren’t fully aware of the deduction and credit options that are available. Working with a qualified accountant or tax professional is a wise, profitable decision.