Navigating the tax landscape can be tricky for small businesses, especially for relatively new small business owners. There are a number of common, easy mistakes a small business can make that will end up costing money in fines and penalties. Fortunately, these errors can be avoided.
Here are some common small business tax mistakes, as well as how to avoid them:
Neglecting to Pay Estimated Tax Payments
You may be assessed a 4% penalty if you miss estimated tax payments throughout the year and then underpay your taxes. These payments—due on April 15, June 15, September 15 and January 15—are usually made if you anticipate owing $1,000 or more in taxes for the year.
The Solution: Check your estimated payments as the year progresses and adjust the amount of future payments, if necessary.
Not Depositing Withholding Taxes
You are required to withhold income and FICA taxes from the paychecks of any employees you may have, and deposit those withholdings into the U.S. Treasury. Should you fail to do that, you may be subject to the Trust Fund Penalty, which can leave you personally liable for 100% of the funds in question.
The Solution: Confirm that you are making the required payroll deposits. Contact the IRS if you have any questions regarding what or how much you need to withhold.
Filing Your Taxes Late
This is an easy mistake for rookie small business owners to make, since the filing deadline for an S Corp or partnership (including an LLC filing as a partnership) is actually March 15, instead of the well-known April 15 deadline that applies to personal taxes.
If you do end up filing late, be prepared to pay fines. Penalties for late filing may range from 5% to 25% of what you owe the IRS, as well as added penalties for each partner.
The Solution: Be sure to double-check the deadline for your return, and file an extension to gain extra time if you require it.
Blending Business and Personal Banking
An easy way to complicate your taxes is to pay for both business and personal expenses from the same bank account and credit card(s), even though it’s tempting to do so. This can cause particular trouble with regard to which expenses you deduct; deducting the wrong expenses may trigger an IRS audit.
The Solution: Maintain a separate business checking account that is not connected to your personal accounts. If you do use one account, you’ll need to keep meticulous records in order to ascertain which expenses apply to your business and which do not.
Not Filing W-2 or 1099-MISC Forms
Any time you pay an independent contractor more than $600, you are required to file a form 1099-MISC by January 31 of the following year, provided there’s an amount to list on Box 7 of the form. For any employees you may have, you’ll need to file a W-2 by January 31 of the following year, regardless of how much you’ve paid them. Your employees and contractors must also receive copies of those forms by January 31.
There are significant penalties your business may face should it fail to file those forms on time, send the copies on time and correct any applicable mistakes. The penalties escalate on a per-return basis, depending on how late the forms are filed.
The Solution: Make sure to file W-2s and 1099s on time each year by January 31. Be sure to do the same for the copies that must be sent to your contractors and employees. And should there be any mistakes in those submissions, do your best to correct the errors as soon as possible.
Incorrectly Categorizing Workers
Reconsider the classifications you may have determined for your workers, particularly whether you are classifying them as employees or 1099 contractors. The rule of thumb is that if you are the one who controls the how, where and when the work is being performed, and if you are supplying the tools, then that worker is most likely an employee, and should be classified as such.
Also, be sure you are treating contractor payments as such, rather than as wages and salaries, which are subject to deductions. You may be overpaying in taxes due to incorrect payroll classifications.
The Solution: Apply the rule of thumb above to determine the classifications of all workers. And be sure that all 1099 payments are properly classified as outside services when listed on returns.
***Are you prepared to file your own small business taxes? Call us today at (818) 242-4888 or schedule your free 30-minute consult now. Robert Hall & Associates is a leading small business tax preparer and consultant serving Glendale, Burbank, Pasadena and the Greater Los Angeles area. Our team of enrolled agents can guide you through the business tax filing process and advise you on locating and gathering the documentation you will need.