Tax Mistakes You Should Avoid As a Small Business Owner

Overlooking Deductions and Credits

One of the most common tax mistakes is overlooking available deductions and credits. These can significantly reduce your taxable income and, consequently, the amount of tax you owe. Many taxpayers miss out on deductions for student loan interest, medical expenses, or charitable contributions.

To avoid this mistake, keep detailed records of all potential deductions throughout the year. Use tax preparation software or consult a tax professional to ensure you're not missing out on any opportunities to save.

Incorrectly Reporting Income

Another frequent error is incorrectly reporting income. This can happen if you forget to include income from side gigs, freelance work, or investments. The IRS receives copies of all your income forms, so failing to report this income can trigger an audit.

To avoid this, keep meticulous records of all your income sources and double-check your tax forms against your records. Using tax software can also help catch discrepancies.

Filing Status Errors

Your filing status can significantly impact your tax liability. Choosing the wrong status, such as filing as single instead of head of household, can lead to higher taxes or missed credits. Understanding the different filing statuses and their implications is crucial.

Consult the IRS guidelines or a tax professional to determine the most advantageous filing status for your situation. This can save you a substantial amount of money.

Math Mistakes

Simple math errors can lead to significant problems with your tax return. These mistakes can result in underpayment or overpayment of taxes, leading to potential penalties or delayed refunds.

Using tax preparation software can minimize the risk of math errors. If you prefer to do your taxes manually, double-check all your calculations or have someone else review them.

Missing Deadlines

Filing your taxes late can result in penalties and interest charges. The IRS imposes a failure-to-file penalty, which can be as much as 5% of your unpaid taxes for each month your return is late, up to a maximum of 25%.

To avoid this, mark important tax deadlines on your calendar and set reminders. If you can't file on time, request an extension, but remember that an extension to file is not an extension to pay any taxes owed.

Not Keeping Proper Records

Maintaining proper records is essential for accurately preparing your tax return and supporting any deductions or credits you claim. Poor record-keeping can lead to missed deductions and difficulties if you're audited.

Keep all receipts, invoices, and relevant documents organized throughout the year. Consider using digital tools to store and categorize your records.

Ignoring State Taxes

Many taxpayers focus solely on their federal tax obligations and overlook state taxes. Each state has its own tax laws and filing requirements, and ignoring them can result in penalties and interest.

Ensure you understand your state tax obligations and file the necessary returns. State tax software or a tax professional can help you navigate these requirements.

Failing to Adjust Withholding

Failing to adjust your withholding can lead to either owing a large amount of tax at the end of the year or giving the government an interest-free loan by overpaying throughout the year. Major life changes, such as marriage, divorce, or having a child, can affect your tax situation.

Review your withholding at least once a year or whenever you experience a significant life change. Use the IRS withholding calculator or consult a tax professional to ensure your withholding aligns with your tax liability.