Thursday, August 06, 2009

Small Business Tax Mistakes to Avoid

Yesterday the Roni Deutch Tax Center – Tax Help Blog posted an entry with the top 10 small business tax mistakes to avoid. I’ve included a few items from the list below, or click here to see all 10 items on the list.

Independent Contractors

Since payroll taxes can add up quickly, some business owners will do everything they can to avoid them. However, this is a big mistake, and can lead to fines and penalties. One tactic that is commonly used is to hire all staff as independent contractors, even when they should be classified as wage earning employees. However, too many independent contractors is a huge red flag to the IRS, and in order to avoid penalties you will need to prove to the IRS that they all meet the rules for the classification. Even if the employees agree to the situation, the IRS may still call your bluff and audit you.

Payroll Taxes

Speaking of payroll taxes, as a business owner you need to understand how payroll taxes work, and how to stay compliant with the IRS in how you withhold and pay them. Since you take taxes out of your employees’ paychecks, it is then your duty to pay them to both the IRS and your states tax department.

Calculations, Calculations

Even if you avoid the rest of these mistakes, making a simple miscalculation can cause a lot of problems. It is of the utmost importance to be correct when calculating your tax payments and yearly tax return. Even if you do calculate the correct amount, the numbers all need to be typed or neatly written on all forms. If you do make a miscalculation on a quarterly payment, then you are going to have to pay the difference to the IRS when you file your full return in April.

Throwing Out Receipts

One of the biggest mistakes a small business owner can make is to throw away receipts for business expenses. Although regular wage earning taxpayers can throw out any receipts they wish, business owners need to be able to verify any purchases you deduct from your taxable income.

Improper Budgeting and Banking

You need to remember to keep your business and personal finances separate. One of the biggest tax mistakes you can make as a business owner is to intermingle your business and personal bank accounts, expenses, or finances. The IRS can monitor your bank accounts, and if they see you are not keeping your business and personal purchases then they are going to want to examine each one during an audit.

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