Are you currently running a small business? Or perhaps, you’re in the early stages of starting one? Taxes can be incredibly confusing, even for the most experienced business owners. It’s essential to understand the most common tax pitfalls that small businesses face, so you can avoid them. In this comprehensive guide, we’ll go over some of the most significant tax pitfalls that small businesses need to avoid.

Misclassifying Employees as Independent Contractors

One of the most significant issues that small business owners may face is misclassifying employees as independent contractors. When you hire someone to work for your business, you must classify them correctly. The classification determines how you pay the worker, the benefits you offer, and how much tax you must withhold.

Independent contractors work independently from your business, and you don’t have control over how they work. In contrast, employees work regularly for your business, and you have control over their work. Misclassifying an employee as an independent contractor could result in fines from the IRS and other government agencies.

A puzzled person looking at tax documents

Failing to Keep Accurate Records

Maintaining accurate financial records is essential for any business. Without proper record-keeping, it’s challenging to calculate your taxes and expenses. You may also run into problems with audits and investigations. Keeping track of every transaction helps you avoid costly errors and makes tax time less stressful.

Whether you’re using software or paper records, it’s crucial to keep track of each transaction, including receipts, invoices, and bank statements. You can also consider hiring a bookkeeper or an accountant to help you maintain accurate records.

A spreadsheet with data entries and numbers

Not Keeping Up With Tax Deadlines

Missing tax deadlines can be costly for your business. The IRS and state tax agencies are serious about enforcing deadlines and can levy penalties and interest. You must know the deadlines for filing your taxes and paying your taxes.

Make sure that you mark your calendar for important dates, such as quarterly estimated tax payments, annual returns, and tax deposit deadlines. You can consider setting up an automatic payment system to ensure that you don’t miss any deadlines.

A calendar with a pen to mark important dates

Overlooking Deductions and Credits

As a small business owner, you may be eligible for several deductions and credits that can lower your tax bill. However, many business owners overlook these opportunities and end up paying more taxes than needed.

Some of the most common deductions and credits for small businesses include home office expenses, health insurance premiums, retirement plan contributions, and more. Be sure to check all the deductions and credits that are available for your business.

A pile of money with a calculator

Mixing Personal and Business Expenses

Mixing personal and business expenses is a common mistake that small business owners make. It’s essential to keep your personal expenses separate from your business expenses. Not only is it difficult to track and report the expenses accurately, but it can also lead to audits or inquiries from the IRS.

To avoid this mistake, open a separate business bank account and use it exclusively for your business transactions. Keep all the receipts for your business expenses, including meals, travel, and supplies.

A person holding two separate wallets for personal and business expenses

Conclusion

Small business owners face many challenges, and taxes are often a significant hurdle that they must overcome. Understanding the most common tax pitfalls can help you avoid costly mistakes and improve your business’s financial health. Make sure to avoid these pitfalls, keep accurate records, and seek professional advice if you ever run into trouble.

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