Businesses each year make unintentional tax reporting mistakes that cost them money or result in huge hassles with the IRS. Below are three huge mistakes that business owners make due to inexperience when filing their tax reports. At the end of the day, it’s easy to see that working with an accounting service when filing your taxes is a sure-fire way to avoid any potential entanglements with the IRS.
1. Mixing Business with Pleasure: Don’t Commingle Expenses
When entrepreneurs first start a business, it can be easy to mix personal and business expenses. However, it is imperative that this be avoided at all costs because the consequences are rough. If you report personal expenses as business expenses, you would wind up facing daunting tax debts.
It’s best to keep these transactions separate from the start. Attempting to track expenses after the fact turns you into a cold-case detective without much evidence. Business owners can keep separate accounts for business and personal transactions. Or, if all transactions are in the same account, be sure to keep receipts and sustain strict bookkeeping practices.
2. 1099 or W-2?
Hiring the first few employees can be confusing. You can hire them as independent contractors, or you can hire them as payroll employees. Independent contractors file a 1099, and payroll employees file a W-2. Be careful, though. The IRS has been known to decide that an independent contractor should have been a payroll employee and target your business for payment of the associated Social Security and Medicare taxes. To avoid this issue, make sure you understand the specific characteristics of an employee who is allowed to file a 1099. Consider this helpful IRS checklist when deciding how to hire and pay your staff, and consult a professional to ensure you understand the requirements.
3. Accounting Mistakes Turn into Tax Mistakes
In preparation for tax reporting, establishing good bookkeeping habits is a must. Without accurate and detailed records, many new business owners have neglected to include legitimate write-offs and found later that they had paid more taxes than necessary.
Poor bookkeeping leaves you at risk to lose your deductions if your business is audited and you don’t have the proper documents to substantiate your claims. Be sure to report accurately and consistently and save receipts, invoices, and other important documentation in a strict organizational system.
4. Neglect the Help of an Accounting Service
Numerous business each year find themselves in a world of hurt because they attempted to do their taxes without proper understanding and education. Working with an accounting service would have saved them money in the long run by helping them to report taxes correctly and avoid the subsequent IRS problems and penalties. Your Balance Sheet LLC would be happy to help you sort through the myriad of reporting procedures and categories to ensure that you save the money that is yours to keep and sidestep the hassle of IRS issues.
Contact Your Balance Sheet today for more information about tax accounting and reporting!