Nobody likes getting an audit notice in the mail, which is why it’s critical to complete your business taxes in a thorough, correct and timely manner. Unfortunately, it’s easy to get tangled in the details of tax code and feel overwhelmed by all the ins and outs of your paperwork. This stress can lead to mistakes, and those mistakes can cause you to miss out on deductions, miscalculate how much you owe the IRS or even land your employees in trouble.
“It’s less expensive to do things right from the beginning than it is to fix mistakes down the line,” says Crystal Stranger, CEO of tax-preparation and advisory firm Optic Tax.
While working with a tax professional such as a certified public accountant (CPA) or a tax preparer can help mitigate these issues, it ultimately takes a full-team effort to get your taxes right – not just during tax season, but throughout the year.
Don’t get your business in hot water with the authorities. The consequences of improper filing can have negative effects on your business that you could feel for years to come. Here are key tax errors that your small business should avoid.
Insufficient record keeping
Without proper record keeping of your expenses, your cash flow, your employee wages and other key financial indicators, it’s impossible to know how much you owe – or how much you can deduct.
“Be diligent in your record keeping. If you come in and you’re prepared, you avoid a lot of the obstacles,” says Paul Miller, CPA and founder of accounting firm Miller and Company. “The books and records are the backbone of your business. So if you get your books and records organized, you have a very good idea of how your business is doing.”
Even if you’re a sole proprietor with a single point of cash flow, keeping track of your expenses over the year can help you maximize your deductions – and prevent you from digging through piles of receipts the night before the tax deadline.
Waiting until tax season
Tax season shouldn’t be the only time of the year you pay attention to your taxes. Like any large undertaking, breaking down your tax priorities throughout the year is more manageable than trying to tackle it all at once.
Not only will this make filing easier, but it can allow you to calculate and prepare for your tax payment well in advance. It can also help you avoid being surprised by your tax bills and help you make decisions that maximize your tax advantages.
Working with a tax professional throughout the year can also be helpful in catching inefficiencies, giving you a better picture of your company’s financial health and helping you ideate strategies to improve your bottom line.
Trying to do it all yourself
Hiring a CPA or a tax preparer can help you in a number of ways. They can help you navigate the intricacies of tax law, maximize your deductions and keep track of your most important financial details.
“It’s really helpful to work with the CPA throughout the year to look at those financials on at least a quarterly basis,” Stranger says.
CPAs and other tax professionals are often at their busiest from January until early April. It can also take time to find a CPA specialized in your industry, so it’s crucial to start looking for one as soon as possible.
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Missing out on deductions
The more deductions you miss, the bigger your tax bill will be. Unfortunately, it’s easy to miss out on deductions for your expenses and other finances. Some deductions you may not know you can take include:
- Interest on business loan repayments
- Business office supplies
- Business equipment
- Transportation costs like gas, insurance and license fees for company vehicles
- Business property rent
- Marketing costs such as billboards, business cards, TV spots and other materials
- Utilities such as power, heating and internet for office space
A CPA or tax professional can help you find deductions and keep good records throughout the year so you can maximize your deductions during tax season.
Getting your deductions wrong
On the other hand, it’s not a good idea to get too overzealous about listing your deductions. This is where misinformation can run rife on social media platforms and give business owners the wrong idea about what they can deduct.
For example, one popular tip seen on TikTok tells workers they can deduct the cost of the clothes they wear to work.
“Now, the IRS won’t allow you to take a deduction for your personal clothes, so that is concerning to me when I hear this type of advice,” says Kem Washington, a CPA and tax writer for Bankrate. “Typically, in order to make a deduction for clothes, it has to be a uniform like for a nurse or a doctor, and something that you can’t wear every day. Ultimately, I worry about people who follow this advice uncritically.”
While the IRS allows you to deduct business expenses for a variety of categories, keep in mind that these expenses must be considered what they specify as “ordinary and necessary for the business.”
Buying bulk tubs of cake frosting, for example, would be considered normal and necessary for a cake decorating business. Trying to deduct bulk cake frosting if you’re a bookstore, however, might raise some red flags. Exercise your best judgement – and consult a tax professional – when it comes to deductions.
Reporting too much loss
You can write off a net loss for your business on your taxes, which works as a deduction. However, if your business fails to turn a profit year after year, then the IRS may take note.
“You do have to be mindful of what and how much you’re deducting,” Washington says. “For example, if your annual revenue is $50,000, but every year you’re claiming expenses of $80,000, it’ll raise red flags from the IRS. The IRS may consider your activity as a hobby and limit your deductions.”
Conducting a cash flow analysis on a regular basis can help you understand whether your business is profitable or not throughout the year.
Paying too much or too little
Balancing deductions, expenses, sales tax along with properly reporting your income is a delicate balance, and without proper precaution, you might not be paying the IRS the correct amount you owe.
While paying too much in taxes can get you a refund, it means you’re missing out on using the money during the year for other things, like hiring additional staff, purchasing more inventory or building out your cash reserves.
Paying too little, however – such as by miscalculating how much you owe, incorrectly reporting deductions or trying to hide your income – can come with harsh consequences. Not only will the IRS require you to pay what you owe, but they may also charge you interest on the balance, enforce fines and enforce criminal penalties.
Missing filing deadlines
Filing your taxes – and your tax paperwork – late can come with consequences, including fines and civil penalties from the IRS.
Some important deadlines for 2024 taxes include:
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Jan. 31, 2025 – Sending employee W2s
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March 17, 2025 – Tax filing deadline for S corporations and partnerships,
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April 15, 2025 – Tax filing deadline for personal taxes and sole proprietorships
Note that limited liability corporations (LLCs) can choose to file as a partnership or S corporations for certain tax advantages – which means that the tax deadline will fall on March 17, 2025. You may also file as a sole proprietorship if you qualify.
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Withholding your employees’ taxes improperly
If you employ W2 workers, you’ll need to pay and withhold payroll taxes on their behalf, such as income tax. Depending on how much they make in a year, you’ll also need to pay for Social Security and Medicare.
Your employees can also request that you withhold additional amounts based on what they estimate they’ll need to pay for taxes.
Not paying payroll taxes can come with stiff fines, as well as criminal and civil penalties.
Additionally, failure to properly withhold payroll taxes can put your employees on the spot for a large tax bill when it’s time for them to file.
Even if you have only one or two employees, you may want to consider using an employee payroll service to help you properly withhold and pay payroll taxes.
Taking shortcuts
If you’re trying to do your taxes in a hurry – or on a budget – it might be tempting forgo the services of a tax professional or a CPA and simply plug the numbers into a tax software application.
While tax software can be helpful for personal taxes, business tax tends to be more complicated – especially if you conduct hundreds of transactions a year, use multiple payment platforms or employ W2 employees.
“If you have a complex tax return, I don’t think tax software would be your best place to go, because even if you hire additional help, it’s very limited,” Washington says.
You should also be wary of using ChatGPT or other generative artificial intelligence (AI) platforms to do your taxes. While using AI may be tempting, the technology isn’t good enough to interpret current tax law and correctly process deductions. It also has the risk of hallucinations that deliver incorrect information.
“There’s just so much complexity,” Stranger says. “The way that AI works and tries to pull material in from all these different web-based sources, when there’s so much misinformation out there already, is really problematic.”
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