Tax season can be a stressful time for small business owners and freelancers, but it doesn’t have to be! No one looks forward to doing taxes (except maybe your accountant), but by avoiding these seven common mistakes you can take the extra stress off your shoulders come tax time.

Note: Due to the Coronavirus Pandemic the US tax deadline has been extended to July 15, 2020 

1. Filing through the wrong form of business

The first step when doing your business taxes is to make sure you’re filing through the right form of business. The most common business structures in the US are Sole Proprietorships, Partnerships, Corporations and Limited Liability Companies otherwise known as LLCs.

The business structure you choose to file through will affect what taxes you’re paying so choose wisely. 

Sole Proprietorship

Sole Proprietorship is the most common form of business organization. As a sole proprietor, you are solely liable for all financial obligations of the business.

Sole Proprietorship could be a good option for your business if:

  • You want to start a business on your own
  • Your business is going to be entirely self-funded
  • You want complete control over all financial decisions made within the business
  • You are looking for flexibility as a business owner to grow and adapt your business as you please.

Filing taxes as a sole proprietor is pretty straight forward. You and your business are one and the same so you don’t have to do two separate sets of taxes. The tax rate is also the lowest of all the business structures.  

If you are filing your business taxes through Sole Proprietorship you will need to file the following forms.

  • Schedule C – For reporting income or loss from your business
  • Form 1040 – For filing your annual income tax return
  • Form 1099 – If you have paid over $600 for the services of an independent contractor you will have to fill out a Form 1099 and send to the contractor and to the IRS

Partnership

When two or more people are involved in a business, you can choose to start a Partnership. Come tax time, a Partnership has to file an annual information return to report the business’s income, deductions and losses. A Partnership doesn’t have to pay business taxes. Instead, it “passes through” any profits or losses to the partners.

Forming a Partnership might be a good option for you if:

  • You would like to share the initial costs of the business
  • You are comfortable sharing control of your business
  • You are comfortable taking responsibility for the actions of your partners.  

If you’re part of a Partnership, filing your taxes will include these forms:

  • Form 1065 – To report the Partnership’s income, losses, and deductions
  • Form 1040 – To report your individual income tax returns

S Corporations

Unlike regular corporations, S Corp is a business structure that allows profits and losses to be “passed through” directly to the owners’ personal income without having to pay corporate taxes.

An S Corp might be a good structure for your business if:

  • You are looking to avoid double taxation
  • You are looking to lower the risk of IRS audit exposure
  • You have a business with less than 100 shareholders, all of whom are US citizens
  • You have a business with only one class of stock

As an S Corporation you will need to use the following forms to file your business taxes:

  • Form 2553 – If you have not formally elected your business as an S Corp you will need to file this form within 2 months and 15 days of the beginning of the tax year
  • Form 1120S – If your business is already an S Corp, this is the form you need to file
  • Schedule K-1 – This form is to be sent to all shareholders to report their share of the business’s income.

The Limited Liability Company (LLC)

This business form combines the liability protection of a corporation with the tax treatment and ease of administration of a Partnership. Many business owners choose to file as an LLC as a way to protect their personal assets. 

An LLC might be the right business structure for you if:

  • You are anticipating losses for the first two years and want to be able to pass those losses through the owners
  • You want flexibility when it comes to the management of the business
  • You want flexibility for sharing profits amongst owners
  • You are looking to minimize ongoing formalities (LLCs are not required to have shareholder meetings and keep as detailed documentation as normal Corporations)

If your business is registered as an LLC these are the forms you will have to fill, depending on its structure:

●  Single-owner LLCs

  • Form 1040 – To report your individual income tax returns
  • Schedule C  – To report your business’s profits and losses

●  Multi-owners LLCs (Partnerships)

After creating an LLC, the IRS automatically treats your business as a Partnership unless you choose to change this status.

  • Form 1065 – To report the Partnership’s income, losses, and deductions

●  Corporate filing requirements

  • Form 1120 – This is used to report the stakeholders’ income, gains, losses, deductions, credits to figure out their income tax liability.
  • Form 1040 – Each owner must file one of these on their personal taxes.

2. Not gathering basic information before filing

When it comes to doing right by your business, the worst thing you can do is get sloppy when it comes to taxes. Before you file your taxes, take the time to make sure you’ve got all the basic information you need. 

The easiest way to limit stress around tax time is by prioritizing your financial health throughout the year. If you commit to staying on top of your finances year round, you’ll have everything you need on hand and won’t have to scramble to gather basic information at the last minute.

This will include;

  • SSN 
  • receipts
  • sales records
  • returns and allowances
  • business checking and savings accounts
  • inventory (purchases, ending inventory, costs of materials and supplies)
  • additional expenses (business trips, travel, etc)
  • wages paid to employees

3. Lumping business and personal expenses together

Part of effectively managing your business is making sure your business and personal expenses are kept separate. Failing to do this can cause errors in your bookkeeping and create larger, more complicated organizational tasks when tax time comes along. 

One way to easily keep your business and personal expenses separate is by getting a business bank account. This way you can make sure you’re not using your personal accounts for business transactions. 

Make sure you are also keeping your business and personal receipts separate. This could be as simple as having two different folders if you are collecting physical receipts and separate email folders for electronic receipts. If you have a business partner or employees, speak to them about following your lead and keeping track of their own expenses.

Savvy business owners should make use of the endless list of business management tools that can aggregate your business spending for you. This will keep you organized and is the single biggest time saver out there. 

4. Missing out on business deductions

Running a business is not cheap and often requires you to take risks financially. Don’t cheat yourself out of tax deductions you are legally owed. The more you can deduct, the less you will pay in taxes and this money can go right back into your business. This document was recently released by the IRS and outlines the most common tax deductions for small businesses and sole proprietors. Some common deductions include;

  • Cars and trucks
  • Salary and wages
  • Contracted labor
  • Supplies
  • Rent on business property
  • Home office
  • Travel
  • Advertising
  • Legal fees

These are some of the most common deductions, but it is not an exhaustive list. If one of your business’s expenses is not listed above, you can always find out if it is deductible by visiting the IRS website.

5. Neglecting bookkeeping until tax season

The best way to limit stress when it comes to tax season is by keeping your thumb on bookkeeping throughout the year. If you don’t feel confident about staying on top of your business’s books, it might be a good idea to hire a bookkeeper. Take the time to hire someone who is good at what they do and won’t cause more problems for your business.

Not every business has it in their budget to hire a bookkeeper. If this is the case for you, another option is to integrate your bookkeeping with other financial management tools.

6. Choosing to not file business taxes online

Thanks to advances in technology, filing business taxes is easier than ever. You can now file your taxes online! Filing taxes online is not only quick and easy, but it’s also safer and often more accurate than doing it manually. 

Instead of preparing your paperwork to take to someone to do your taxes for you, save time and money by preparing your taxes online for free.

7. Skipping proofreading

One mistake even the best business owners make when it comes to doing their taxes, is not taking the time to proofread the forms they are submitting.

By not taking the time to proofread before filing your taxes you could end up sabotaging yourself and your business! Small errors such as misspelled names, information on the wrong line, or an incorrect SSN can have serious consequences. Make sure you take the time to carefully read and reread your forms.