The actions you take now have a big impact on how much you pay or receive back as a refund when you file your small business tax return next April. At Palmetto Payroll, we typically advise small business clients to aim for breaking even with the IRS in that they neither owe nor receive a refund. While it may be impossible to get your tax return that exact, you are more likely to break even by avoiding common small business tax mistakes. We highlight three of them below.
Failing to Make Estimated Tax Payments or Underestimating
The IRS and most state governments require self-employed individuals to make quarterly estimated tax payments since it’s not possible to deduct from their paycheck. Due dates for estimated payments are as follows:
- 1st quarter: April 15 for income earned between January 1 and March 31
- 2nd quarter: June 15 for income earned between April 1 and May 31
- 3rd quarter: September 15 for income earned between June 1 and August 31
- 4th quarter: January 15 for income earned between September 1 and December 31
Although the quarterly payment for fourth quarter comes first in a calendar year, it is the last payment you make for the previous calendar year. These due dates may be different in 2020 because of the financial impact of COVID-19 and extension of tax deadlines by the IRS and some state governments. We can advise you of that during your initial consultation.
You need to make estimated quarterly payments if you expect to owe $1,000 or more in federal taxes for the calendar year. The IRS and state governments may impose a penalty for underpayment or failing to make timely quarterly payments, so make sure you follow instructions and submit your payments accordingly.
Co-Mingling Business and Personal Financial Records
Separating your business and personal finances from the start can help you avoid a lot of aggravation when it comes time to file your taxes for each. The problem with mixing them together is that you may miss legitimate business deductions or add your personal income from other sources as business revenue. Each of these tax mistakes will require you to pay more than necessary.
We recommend opening a separate checking account and credit card for business right away. However, a consultant from Palmetto Payroll can assist you with separating your finances if you have not yet done that.
Not Sending W-2 or MISC-1099 Forms on Time
The IRS requires every business to issue a W-2 form to all regular employees by January 31 that lists their wages and deductions for the previous calendar year. This is true regardless of how much or how little the employee worked for your company. You must also issue a MISC-1099 form for all independent contractors whom you paid $600 or more during the previous calendar year.
It is essential that you classify regular employees and independent contractors correctly to avoid penalties by the IRS. If you are not certain which category to choose and whether to issue a W-2 or MISC-1099, this resource from the IRS will help you make the right choice.
These are just three of the most common mistakes that small business owners make with their taxes. We invite you to schedule an appointment to learn more about efficient tax planning for your company.