- By Bob Goren
- Published 12/15/2011
Most business owners intend to complete their IRS paperwork honestly and accurately. Even so, many make minor yet costly mistakes when filing their taxes and sometimes, business owners unwittingly miss out on valuable deductions. Other times, they commit errors that lead to IRS audits and penalties, which is something to be avoided at all costs!
If you’re a small business owner who juggles many responsibilities, you might be especially prone to letting a few tax issues slide. Here are some useful tips to help you maximize your return and avoid IRS problems.
Keep the IRS Happy with Separate Business Records
It’s important to separate your personal finances from your business finances. For one thing, maintaining separate checking accounts helps establish that your business is not merely a hobby. If you deduct losses from your income for three years out of five, you’ll appear to be operating a “hobby business” and could trigger an audit.
Additionally, having separate checking accounts will make your life easier in case of an audit. Imagine the headache of poring through every financial transaction you’ve made in a year and determining whether it was for personal or business purposes! Instead of using one account for everything, it’s a good idea to transfer a monthly payment from your business account to your personal account.
Having a special checking account for business transactions can also bring benefits unrelated to taxes. For example, business checks promote a professional brand. Also, compared with personal checking accounts, a business account might allow for better banking services that will help grow your company.
Save Cash for Tax Time
In the US, income tax ranges from 10% to 35%. When you were an employee, budgeting for this payment was easy, since tax money was automatically withheld from your paycheck. Now that you’re self-employed as a small business owner, it’s important to tuck that tax money away yourself so you don’t end up overwhelmed in April.
The IRS also has a requirement in place to help self-employed people budget for taxes. Most self-employed people (i.e., those who anticipate owing more than $1000) need to make tax payments every 90 days. Called “quarterly estimate payments,” these help people avoid accruing a large bill at the end of the tax year.
It’s wise to save an appropriate percentage of your income every month so that a quarterly or annual tax bill doesn’t seem intimidating. You could also take the opportunity to earn a bit of interest by stashing this cash in a money market account.
The Importance of Receipts
If your small business originated as a hobby, then you might not have kept receipts for what have become business expenditures. For example, your work-related computer, art supplies or storage shelves might be tax deductible. Track down as many receipts as possible or at least write down price estimates while they’re fresh in your mind.
It’s also important to annotate certain receipts in case you get audited. For example, if a business appointment involves buying gas, driving to a restaurant and paying for a meal, then you should make a note of that meeting on your receipts for fuel and food. Be sure to log your car’s odometer readings for each appointment too.
Don’t Play Hard to Get
Many people ignore collection calls and mail from the IRS. Some put off communication because they’re terrified of what the IRS might say, while others figure they’ll amass money for a payment “soon enough.” If you’re among these folks, it’s time to stop procrastinating, because if you have any financial problems it’s much better to communicate with the IRS pro-actively so they can help you figure out a solution.
A major risk of ignoring the IRS is being charged with tax evasion, which can result in a penalty of up to $25,000 per year. In worst case scenarios, some people are even incarcerated for tax evasion. So, the sooner you communicate with the IRS, the better.
If you think you owe taxes this year, but you won’t be able to file by the deadline, apply for an automatic six-month extension. The penalty you receive will be much smaller than that charged for not filing taxes at all. Also, remember that payment plans are available.
Meet With an Accountant
No tax tips list is a substitute for meeting with a certified accountant. Getting personalized, professional advice about filing taxes could save you thousands of dollars – and it might even be deductible. An accountant will help ensure that your return is legally sound; he or she can also help maximize your deductions while making sure you don’t make any questionable claims.
It’s important for self-employed people to be aware of their special tax responsibilities. Besides following the tips above, it’s a good idea to read the relevant pages on the IRS website. You can learn a lot through the government’s clear explanations of tax requirements for small businesses and independent contractors. Above all, be informed, be pro-active and if you’re in any doubt, meet with a finance professional before filing taxes with Uncle Sam.
About the Author: Bob Goren is an accountant and independent advisor on filing taxes in the US.