It doesn't matter who you are, taxes seem complicated. However, this is particularly true if you're a business owner.
There are numerous pitfalls that small business owners might fall into when handling their taxes. Some of these issues can cost them sizable amounts of money, and some can even lead to legal trouble.
Curious as to what these pitfalls are? Here are five common small business tax mistakes.
1. Doing it Alone
It doesn't matter whether you're filing as an individual or as a business, filing your taxes is a complex process. It's for this reason that we recommend you hire a tax specialist of some kind. One of the biggest mistakes small businesses make with taxes is doing it alone and not utilizing the services of a professional tax attorney or CPA.
An experienced tax professional can help you keep your tax matters organized, ensuring that you're withholding the proper amount of taxes, taking and optimizing the right deductions, and doing everything in a legally appropriate manner.
2. Making All Employees Independent Contractors
Many small businesses will attempt to reduce their tax burden by classifying their full-time employees as independent contractors. If you're doing this, you could be making a huge mistake that could come back to bite you in the future.
Misclassifying your employees is illegal, and very often leads to IRS audits. Make sure to classify your employees properly if you want to avoid potentially huge tax penalties. We've handled many IRS audits on this subject and can help prevent such an audit.
3. Not Deducting Enough Expenses
One of the most common mistakes small businesses make when filing taxes is not deducting enough of their expenses. This often happens because these businesses are not sure if they are legally allowed to deduct certain expenses. In fear of being audited, they forego a great deal of money that they shouldn't be losing out on. Remember, the chances of losing a deduction are 100% of they are never claimed.
Does your business need help determining what should and shouldn't be deducted on its tax return? An experienced tax attorney can help.
4. Failing to Keep Tax Records
As a business owner, it is absolutely vital that you keep detailed records of every transaction your business makes. This is important for a few different reasons. Not only does it help you to maximize your tax deductions, it proves the legitimacy of those deductions, helping you fight the IRS in case of an audit.
You should be saving invoices, receipts, and any other document that notes a transaction. These days, it's wise to save these documents in some type of accounting software.
5. Choosing the Wrong Business Designation
One last tax mistake that is commonly made by small businesses is choosing the wrong business entity. There are a number of different business entities available, all of which have a different effect on how your business will handle its taxes.
For example, whereas some businesses benefit more from designating themselves as a Limited Liability Company (LLC), others may benefit more from designating themselves as a Subchapter S Corporation.
If you need help choosing the right designation for your business, you should speak with a tax attorney. He or she will be able to help you choose the entity and/or business structure that most reduces your tax burden while meeting your other business needs.
Work with a Mount Prospect Tax Attorney
Are you a small business owner? Do you need help handling your taxes? Interested in working with a reputable Mount Prospect tax attorney? The skilled attorneys at John J. Pembroke & Associates are the people to see.
We have worked with a variety of small business owners throughout the Mount Prospect area, ensuring that they always make wise tax decisions. We would love to work with you as well.
Contact us today to get started!