Many entrepreneurs find that filing business taxes is not only time consuming but also difficult, especially if you are doing it for the very first time – often you do not have the right forms, and you are rushing around at the last minute trying to find the right receipts. If you are a sole proprietor, you will need to complete the long Form 1040, in addition to Schedule C and Schedule SE. If you forget about income and earnings, you will leave yourself exposed to an audit by the Internal Revenue Service (IRS).
Below are some common mistakes made by sole proprietors like you along with some tips you can follow throughout the year that will help you save time and a headache around the tax time.
No. 1. Forgetting to Set Aside Payments for Quarterly Taxes
For sole proprietors, tax time happens more than one time each year – it happens quarterly. As a business owner, you are obligated to pay estimated taxes every three months. If you are new to business or make under a certain amount, do not worry you are not required to pay these taxes for the first year.
If you are a sole proprietor, you want to make sure you pay these estimated taxes to sidestep an IRS penalty and tax surprises on time – the Third quarter estimated payments are due on September 15th. Often sole proprietors choose to reserve a percentage of each payment they receive to ensure they have enough funds to cover the tax bill.
No. 2. Refusing to Ask a Professional
If you choose to estimate your taxes on your own, you may run into trouble – if you pay too little, you can incur penalties and fines. On the other hand, if you pay too much, you are given the IRS an interest-free loan. The best way to dodge surprises and penalties is meet with a tax professional.
No. 3. Under Reporting on Income Taxes
Are you under reporting your business income? It has been suggested that sole proprietors under report business income by approximately $70 billion. Make sure you do not make the same mistake – whether it is intentional or not, you are still responsible in the eyes of the IRS.
If you are a sole proprietor and have made more than $600 so far this year, the company that hired you should send you a 1099-MISC reporting your compensation. The IRS will receive this form as well, so they will know if you have failed to report your earnings. Even if you did not received your 1099-MISC form, you are still required to report the income on your tax return. Keeping tabs on all your income will make it easier come tax time.
No. 4. Failing to Report All Your Expenses
From your business’s beginning, there are a number of tax-deductible business expenses that should be on your radar. Some of these expenses include cell phones, travel expenses, equipment and home office deductions and more. Do not forget to keep up with these expenses so things are not complicated for you when it is time to pay taxes.
No. 5. Postponed Back-Tax Payments
If you owe money to the IRS, it is in your best interest to seek the help of a tax resolution lawyer. Postponing payments on your back taxes only furthers your debt and it affects the overall success of your business interactions. The tax resolution attorneys like those at U.S. Tax Shield can help you resolve your debt with a payment plan that best suits your individual needs.
No. 6. Choosing the Incorrect Legal Entity
Certain factors like tax bracket and the sum of self-employment taxes may be contributing to loss of income for sole proprietors. Actually, many sole proprietors may be paying more in taxes than some owners of corporations may. Changing your tax structure may help you save money, but consult with a tax professional to determine what is right for your business.