(Newswire.net — January 29, 2021) — In the 21st century, every individual is liable to pay taxes to the government. The government uses taxpayer’s money for public spending, social security, education, and infrastructure. In short, they charge taxes to run the country smoothly while providing amenities to the citizens. Although the concept of paying taxes sounds reasonable, no one is fond of paying taxes. Individuals have to cut back on their income, whereas businesses have to give away a significant chunk of profits in taxes.
Is your business paying taxes timely? Amongst millions of other business tasks, only filing taxes feels like an uphill battle. While some entrepreneurs find ways to cut back on tax expense, others struggle with calculations. Simultaneously, there is always confusion about reporting and filing dates. In all the hustle-bustle, many business owners end up overpaying taxes. Sometimes, they also forget to account for tax credits and deductibles, opening doors to an IRS audit.
Honestly, tax mistakes are the worst! In addition to exhausting business resources, filing errors and glitches can lead to hefty penalties. However, with little work throughout the year, filing taxes can be free from mistakes. If you don’t know where things can go wrong, have a look below. Here are the seven most common tax filing mistakes made by business owners.
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Tax Miscalculations
Any idea about the prevailing tax rate? Surprisingly, different rates apply to varying types of taxes. Businesses have to pay corporate tax of 21% on their profits. Likewise, they have to account for various income tax rates on employees’ payroll payments. And if you are operating in the retail sector, sales tax will also be your headache. Whether you are a tax specialist or not, calculation mistakes are prone to happen with manual calculations. So, why not use a savvy tax application?
If you are running the business single-handedly, use a freelance income tax calculator to fulfill your legal obligations. It would calculate your monthly income, track expenses, and calculate tax as per the state regulations. Similarly, businesses can also take advantage of digital tools to eliminate the chances of miscalculations and errors.
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Inadequate Records & Payroll Errors
The essence of running a business is that you are not accountable to anyone. As a result, keeping clean and organized records is not the entrepreneur’s strong point. Alongside impacting business efficiency, inadequate records can lead to tax filing errors. After all, you don’t have any income or expenses to report. The Internal Revenue System (IRS) needs precise and accurate records with receipts during the tax filing procedure. Or else, you can lose potential tax deductions.
Likewise, mistakes on payroll can also land your business into hot water. For instance, you might not be deducting tax payments, or there could be some error with social security deductions.
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No Track of Deductibles
Since ‘tax deductibles’ sounds like a fancy term, many businesses ignore it while calculating taxes. However, these deductibles are the business expenses that help in lowering the taxable income. For instance, if you spent $500 on marketing, deducting it from overall costs can reduce your income and the tax expense. In short, without subtracting tax deductions from overall expenses, you end up overpaying taxes. Hence, learn about standard tax terms before you call the shots.
Moreover, business meals and entertainment costs for business purposes can also be deductibles. As a result, business owners try to deduct 100%, raising a red flag with IRS. Under the Trump Tax plan, only 50% of the total bill is deductible. Therefore, make sure you are well-versed with these protocols.
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Mixing Personal & Business Finances
People who know about tax deductions end up misusing them often. For the sake of reducing taxable income, they combine personal expenses without realizing its repercussions. After all, paying for groceries from a business credit card doesn’t make them a business expense. Besides hefty penalties, this silly mistake will put you under the radar, leading to reputational risk. Hence, you must keep separate accounts and credit cards for business expenses. Alongside saving you from penalties, individual accounts will make it easier to track deductibles.
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Incorrect Choice of Business Entity
Usually, small businesses form a standard C-corporation or LLC, but this can be a huge mistake. You have to pick a suitable business tax entity, depending on your business structure, the number of workers, and financial standing. If you are running a business alone and form an LLC, you will be paying corporate and income tax. It would double your taxable income while decreasing the amount of personal funding.
Similarly, if you wrongly label it as a partnership, it will decrease your liability protection. All these mistakes can hurt business profits, resulting in losses. Therefore, understand the benefits and drawbacks of each type of entity to make the right choice.
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Filing the Wrong Tax Forms
Despite your tax situation, the IRS will offer multiple tax forms for returns and reporting. If you are unable to differentiate between Form 1040 and 1040EZ, the business will face surplus costs. Likewise, you will have to fill additional revision forms with six new schedules. Understand the purpose of every form and ensure you are filling out the correct ones.
If you are reporting profits, you have to complete a Schedule C form. Otherwise, you have to fill out Form 1040 for reporting individual income. Above all, make sure you are not filing under the wrong status. Married couples can file tax jointly, whereas there are special deductions for the elderly.
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Unaware of Tax Developments
Even though you are working with a proficient tax accountant, you might skip on tax developments. At times, the government makes significant tax changes that directly impact your business practices. And your lack of knowledge and awareness regarding these developments puts the entire business into trouble. There have been many changes in income tax rates as the brackets dropped from 39.6% to 37%.
Every business owner should stay on top of all tax developments to avoid paying additional taxes. Besides this, the tax rates also vary at the state and federal level. Each of the 50 states has separate filing obligations and tax breaks protocols. Thus, you have to prepare tax plans while keeping both state and federal taxes in mind.
Final Thoughts
Every business owner works super hard to make their business thrive and giving away a proportion of profits is quite overwhelming. Since you can escape these obligations, learn to become smart about it. You can take an extra measure for tax planning and utilize savvy tools to increase your take-home income. Also, familiarize yourself with the tax world and tax terminology to rule out any chances of mistakes and errors.