Entrepreneurs and small business owners wear many hats running a company, but doing so could leave you open to mistakes, particularly when filing and paying taxes. Inadvertently failing to comply with tax laws, accidentally violating tax codes or filling out your forms inaccurately can leave your business open to severe penalties. In order to avoid inaccuracies, it’s best to hire a tax attorney or a Certified Public Accountant (CPA), but being aware of common mistakes can also help.
Underpaying estimated taxes
Businesses typically pay quarterly estimated taxes, and it’s up to you to determine how much to pay. In general, if you’re making four equal payments, you should be able to avoid a penalty, but you may be charged for underpaying estimated tax. According to the IRS, “If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90 percent of the tax for the current year.”
Like individual income taxes, business taxes must be filed by a certain deadline. If you’re unaware of this deadline, or miss it because you were too busy, you will likely end up paying a penalty. You may also be penalized for filing late if you fail to file the correct paperwork. Cameron Keng of Entrepreneur.com explains, “We’re required to file a 1065 Partnership Tax Return for any LLC that has more than one member or owner, even if you made no money or lost money.” To avoid penalties, make sure you are aware of all tax requirements for your type of business entity, and be sure to note the due dates.READ MORE: 'It's Just Not Working': Women In The Workforce Hit Hardest By Pandemic
Improperly distinguishing business costs
When you are a sole proprietor, it can be tempting to use one credit card for business and personal expenses. However, doing so can make it difficult to determine which expenses are personal and which are legitimate business expenses. “On paper the IRS’s Publication 535 lays out its guidelines succinctly, stating that a business expense must be both ordinary and necessary in order to be deducted,” notes author and magazine contributor J.D. Roth. Using a single card for business and personal expenses could backfire if you are ever audited. By keeping one card for business purchases, it will be easier to track legitimate business expenses for deduction.
Turning over your taxes to a professional is the easiest way to avoid making mistakes. However, being familiar with tax codes and guidelines and making sure you have all the correct forms and paperwork can potentially save you from paying penalties later.
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This article was written by Alaina Brandenburger for CBS Small Business Pulse