Posted on May 15, 2023

Filing your tax return can be a stressful and overwhelming task, especially if you're a small business owner with limited knowledge of the tax code. Making mistakes on your tax return can have serious consequences, including penalties and potential audits. 

To help you navigate the complexities of tax filing, we've identified six common tax mistakes that you should avoid. By steering clear of these pitfalls, you can ensure a smooth tax filing process and maximize your potential savings.

What Is a Tax Return and Who Should File It?

A tax return is a document that individuals and businesses are required to file with the government, typically on an annual basis, to report their income, deductions, and tax liability. It serves as a comprehensive summary of your financial activities throughout the year and allows the government to calculate the amount of tax you owe or the refund you may be eligible for. But who exactly should file a tax return?

Individuals

The requirement to file a tax return depends on several factors, including your filing status, age, and income level. In general, if your income exceeds a certain threshold determined by the IRS, you are obligated to file a tax return. It's important to note that even if your income falls below the threshold, there may be other circumstances, such as self-employment or receiving certain types of income, that still require you to file a tax return.

Businesses

The filing requirements vary depending on the entity type. Sole proprietors, partnerships, limited liability companies (LLCs), and corporations all have specific guidelines determining when and how their tax returns should be filed. Regardless of the business structure, it is crucial to understand the filing requirements and deadlines to avoid penalties and compliance issues.

Let´s review now the six most common mistakes while filing tax returns.

Top 5 Common Tax Mistakes When Filing Taxes

Filing taxes can be a daunting task, especially for small business owners who may not have a deep understanding of the tax code. Mistakes made during the tax filing process can lead to penalties, missed opportunities for deductions, and potential audits. 

To help you navigate the complexities of tax filing and avoid common pitfalls, we've identified six common tax mistakes you should be aware of. 

By understanding and avoiding these mistakes, you can ensure a smoother tax filing experience and maximize your potential savings. Let's dive into the details of each mistake:

1. Neglecting to Keep Accurate Records

One of the most crucial aspects of filing an accurate tax return is maintaining thorough and organized records throughout the year. Failing to keep accurate records can lead to incorrect deductions, missed opportunities, and potential issues with the IRS. Here are three key record-keeping mistakes to avoid:

• Mixing Personal and Business Expenses: It's essential to separate your personal and business finances by using separate bank accounts and credit cards. This practice helps ensure that you accurately track and report only the expenses related to your business.
• Incomplete or Missing Documentation: Make sure to gather and retain all necessary receipts, invoices, and other supporting documents for your expenses. Without proper documentation, you may not be able to substantiate your claimed deductions, increasing the risk of audit or denial.
• Failing to Track Mileage: If you use your vehicle for business purposes, keeping a detailed mileage log is crucial. This log will help you accurately calculate your business-related mileage deductions and provide evidence in case of an audit.

2. Overlooking Deductible Expenses

As a small business owner, it's essential to be aware of the various expenses that may be eligible for deductions. By overlooking deductible expenses, you may miss out on valuable tax savings. 

Here are three common deductible expenses that are often overlooked:

• Home Office Expenses: If you have a dedicated space in your home used exclusively for your business, you may qualify for the home office deduction. This deduction allows you to claim a portion of your rent or mortgage, utilities, and other related expenses.
• Professional Services: Expenses incurred for professional services, such as legal or accounting fees, may be deductible. These expenses are essential for the smooth operation and compliance of your business, so be sure to include them in your tax return.
• Business Travel and Meals: If you travel for business purposes or entertain clients, certain expenses related to travel, meals, and entertainment may be deductible. It's important to understand the specific rules and limitations surrounding these deductions to ensure compliance.

Related: The Top 5 Tax Deductions Every Small Business Owner Should Know

3. Mishandling Self-Employment Taxes

As a small business owner, you are responsible for paying self-employment taxes, which include both the employer and employee portions of Social Security and Medicare taxes. Mishandling self-employment taxes can lead to costly mistakes. 

Here are three self-employment tax pitfalls to avoid:

• Failure to Make Estimated Tax Payments: If you expect to owe $1,000 or more in taxes, you're required to make quarterly estimated tax payments throughout the year. Failing to make these payments can result in penalties and interest charges.
• Incorrectly Calculating Self-Employment Tax: Ensure that you accurately calculate your self-employment tax by considering the correct tax rate and the net income from your business. Consulting a tax professional can help you navigate the complexities of self-employment tax calculations.
• Not Taking Advantage of Self-Employed Retirement Plans: As a small business owner, you have the opportunity to contribute to retirement plans specifically designed for the self-employed, such as a SEP IRA or a Solo 401(k). Failing to take advantage of these plans means missing out on valuable tax deductions and potential long-term savings for your retirement. Explore these retirement plan options and determine which one suits your business and financial goals.

4. Incorrectly Classifying Workers

Determining the correct employment classification for your workers is crucial for tax purposes. Misclassifying workers can result in penalties and additional tax liabilities. 

Here are three common worker classification mistakes to avoid:

• Treating Employees as Independent Contractors: It's important to understand the criteria set by the IRS for classifying workers as employees or independent contractors. Misclassifying employees as contractors can lead to significant tax consequences, including unpaid employment taxes.
• Ignoring the Employee vs. Contractor Guidelines: The IRS provides guidelines to help determine whether a worker should be classified as an employee or an independent contractor. Familiarize yourself with these guidelines and ensure that you accurately classify your workers to avoid any potential issues.
• Misunderstanding Worker Classification Laws: Various federal and state laws govern worker classification. It's crucial to stay informed about the specific laws and regulations in your jurisdiction to ensure compliance and avoid penalties.

5. Inaccurate Reporting of Business Income and Expenses

Small business owners often face challenges when accurately reporting their business income and expenses. Failing to report income or inaccurately reporting expenses can lead to discrepancies and potential IRS scrutiny. 

Two common mistakes to avoid are:

• Underreporting Income: It's crucial to report all business income, including cash and non-cash transactions. Underreporting income or omitting it entirely can trigger an audit and result in penalties. Keep thorough records of all business income sources and consult with a tax professional to ensure accurate reporting.
• Inadequate Documentation of Expenses: Properly documenting business expenses is vital to support their deduction on your tax return. Inadequate documentation, such as missing receipts or incomplete records, can result in disallowed deductions. Maintain organized and detailed records of all business expenses, including receipts, invoices, and bank statements, to substantiate your deductions and ensure compliance.

6. Failing to Seek Professional Guidance

Perhaps one of the most common and costly mistakes is attempting to navigate the complex world of taxes without professional guidance. As a small business owner, you have a myriad of responsibilities, and understanding the intricacies of tax laws may not be your area of expertise. 

Here's why seeking professional tax guidance is essential:

• Knowledge and Expertise: Tax professionals, such as Woodson & Associates, possess the knowledge and expertise to navigate the complexities of the tax code. They stay up to date with the latest changes in tax laws and can provide personalized guidance tailored to your unique situation.
• Maximizing Deductions: Tax professionals have the experience to identify and maximize the deductions available to you, ensuring you take full advantage of every eligible expense and minimizing your tax liability.
• Avoiding Costly Mistakes: By working with a tax professional, you reduce the risk of making costly errors on your tax return. Professionals can help you accurately report your income, deductions, and credits, reducing the likelihood of IRS audits or penalties.

Related: Why Are You Paying Your Taxes

Conclusion

Filing a tax return can be a complex process, especially for small business owners who may have additional considerations and deductions to account for. 

If you're unsure about your filing obligations or need assistance with preparing and filing your tax return, the experts at Woodson & Associates are here to help. Contact us at (573) 298-6382 or email us at [email protected] to learn how our tax preparation services can support you in meeting your tax filing requirements accurately and efficiently.

By avoiding these common tax mistakes and partnering with a trusted tax professional, you can file your tax return with confidence, optimize your tax savings, and focus on what you do best—growing your business.