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Taking care of all the needs of the core of your business is tough! The last thing you want to do is pour over your financials, read the IRS website for tax law changes, and sort receipts a couple weeks before taxes are due. IRS penalties are stiff! Make sure you avoid these top ten mistakes small business owners make.
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- Handling deductions incorrectly- Many either claim deductions they aren’t entitled to or don’t take all the exemptions and deductions they should. Check IRS Publication 535 for the latest news.
- Not keeping up to date with current tax laws- tax laws constantly change! The IRS doesn’t care if it’s your first time doing your business taxes or your 25th time. They expect you to do it accurately the first time around. If you are running a business, that’s a lot to keep up with.
- Classifying workers incorrectly- You can’t assign a worker as an independent contractor but treat them like an employee (set hours, benefits, etc). They are very different in the eyes of the IRS!
- Borrowing from Employee Withholding & Social Security- If you borrow from employee withholding or social security, you are personally liable and can face huge penalties! You must obtain a Form W-4 (Employee’s Withholding Allowance Certificate) to determine how much to withhold from each employee.
- Assigning excessive compensation- Did you know you can’t pay yourself “unreasonable compensation”, even if your business is doing fantastic?
- Not keeping proper documentation- You need to keep organized! Many use a tax organizer to keep things organized but even then you need to take the time to stay up-to-date. Even though you aren’t required to save business receipts under $75, you still need to know what they were for. You need to be keeping up with your current financial state throughout the year, not just only paying attention during tax season.
- Mixing up office equipment and supplies- Some things are depreciated and some are deducted and can’t be mixed up. Along with office equipment versus supplies, don’t mix up business and personal deductions…although you can deduct a home office. It’s a tricky line.
- Negligence or fraud in reporting- There is a 20% penalty for negligent reporting and a 75% penalty for under reporting income with fraudulent intent. The IRS chooses whether it’s negligence or fraud. Yikes.
- Not preparing estimated taxes- Quarterly payments give you more chances of messing up. Make sure you get those payments out on time and don’t let the deadlines sneak up on you. Underpaying taxes means big, fat penalties (average of $848) and overpaying means an interest free loan to the government! Both also mean lost money to your business. Did you remember unemployment taxes?
- No check system- You need to have two people involved in accounting- one who write checks and the other who does accounting. Never have it be the same person or you can set yourself up for trouble.