Did you know most businesses have a hard time during tax season? If you want to learn about common tax problems business owners face, we can help.
In this guide, we’ll explain common tax issues or mistakes business owners make.
Want to learn more? Keep reading.
- 1 1. Forgetting to Set Aside Tax
- 2 2. You Don’t File Quarterly Estimated Payments
- 3 3. Not Reporting Cash Payments
- 4 4. You Over Deduct Expenses
- 5 5. You Don’t File
- 6 6. Poor Record Keeping
- 7 7. You Made a Mistake With the Worker Classification
- 8 8. You Didn’t File on Time
- 9 9. You Didn’t Attach the Right Forms or Schedules
- 10 11. You Don’t Stay Up-To-Date With Tax Developments
- 11 12. You Made a Mistake
- 12 Tax Issues You Can Avoid
1. Forgetting to Set Aside Tax
New business owners face an unpleasant surprise when they file their first return. You will owe an extra amount in self-employment tax on your net self-employment income.
Employers and employees have to cover Medicare and Social Security taxes. Yet, a self-employed worker will need to pay the entire amount.
Take advantage of tax deductions to help with the extra tax fees. Look at getting a home office tax deduction and mileage deduction.
2. You Don’t File Quarterly Estimated Payments
Self-employed business owners should look at filing quarterly tax payments to the IRS. You won’t have your taxes withheld as a traditional worker would.
So make sure you don’t forget about these quarterly estimated tax payments. Otherwise, you could face penalties and interest.
3. Not Reporting Cash Payments
Some cash-based businesses need detailed bookkeeping to handle expenses and income.
With a cash-based business, you’ll need to use Forms 1099 to substantiate income. The income should get reported, no matter if it’s shown on a 1099 or not.
Do you need some help with managing your books? Look at outsourcing this task to a reputable company. Check out
4. You Over Deduct Expenses
Travel, phones, home offices, and entertainment expenses get deduced by small business owners. Owners do this to lower their taxable income.
There are rules surrounding personal versus business expenses that can become confusing.
The IRS sees these expenses as personal and not deductible. Maintain records to prove that different costs are related to your business.
5. You Don’t File
Some small business owners won’t file their taxes because they can’t afford the bill that’s due. There are severe consequences with not paying taxes.
If you don’t file, you could end up with significant penalties or interest payments. You could have a 25 percent failure to file a penalty that gets tacked onto the tax bill if you’re late.
6. Poor Record Keeping
A lot of tax problems small business owners face relate to their poor record keeping.
A business owner might collect sales tax from their customer but won’t pass it to the state, resulting in underpaying their sales and use tax rule.
Collected sales tax will cover that. If it doesn’t get paid through the business, you’ll be held responsible and liable for sales and use tax debt.
A small business owner might underpay their income tax. You might think it’s optional to complete quarterly tax, but it isn’t.
The estimated tax payments are a rule, and if you don’t pay them on time, you’ll end up paying more money.
Some people fail to estimate their quarterly tax, and the government auditor will do the estimation.
You will owe the tax liability that the auditor estimates if you don’t keep accurate documentation. You won’t be able to challenge the estimate.
Poor record keeping will result in issues when it’s time to file your taxes.
7. You Made a Mistake With the Worker Classification
As an employer, you shouldn’t make mistakes with tax obligations. Don’t label your employees as independent contractors if they aren’t.
The IRS will always look out for these kinds of mistakes, and it will cost owners a lot.
8. You Didn’t File on Time
Some business owners make the mistake of filing at the wrong time. You can always ask for a filing extension if you don’t think you’ll be able to file on time.
You don’t need to give a reason why you’re asking for more time. Make sure you do file your taxes by the extended date they provided you.
With proper planning, you can make sure to avoid this problem. Ask an experienced business owner for some tips on how they prepare for tax season. You don’t want to face the stress of late fees.
9. You Didn’t Attach the Right Forms or Schedules
Your return won’t be complete if you don’t include the required paperwork. If you rely on the IRS to deduct capital items instead of capitalizing them, attach the statement.
10. You Don’t Understand the State and Federal Tax Rule Differences
Some tax breaks for your federal return will get limited for your state’s income tax purposes.
Many states have rules when it comes to the Section 179 deduction and bonus depreciation.
11. You Don’t Stay Up-To-Date With Tax Developments
Changes in tax laws will end up affecting what you’re entitled to on your current return. Sometimes, new tax breaks will entitle business owners to a refund if they send in an amended return.
Some tax breaks expire, while new ones get developed. Make sure you understand what tax breaks apply to your situation.
12. You Made a Mistake
The IRS might disallow deductions, and it could impose a penalty that can only get avoided for a reasonable cause.
It would help if you showed you rely on a tax professional, but you must disclose all relevant information.
Tax Issues You Can Avoid
We hope this guide on common tax issues was helpful. Avoid common tax problems by keeping detailed records and working with reputable accountants. Stay up to date with tax developments.
Are you looking for more business tips? We have many helpful resources on the blog so stick around.