5 Common Mistakes Small Business Owners Make on Their Taxes (and How to Avoid Them)

As a small business owner, you’re responsible for nearly every aspect of running your company–right down to doing your own taxes. You might enlist the help of a professional to get you started, but you also may not yet be able to pay an accountant or even a tax firm to file for you.

No matter how long you’ve been in business, you may have a few bad habits when it comes to recordkeeping and filing your taxes. You’re either putting yourself at risk of an audit or leaving money on the table you should get back.

What Are the Biggest Tax Mistakes Business Owners Make?

Recently, the United States Senate approved $80 billion in IRS funding, with $45.6 allocated to enforcement. Are you likely to be one of the targets for audits? The department estimates another 87,000 employees to cover enforcement. If you run a small business, you may be at more risk of agents looking closely at any big changes.

One thing you can do to reduce your risk is look over some of the biggest mistakes small business owners make and ensure your records are up to date and accurate. Here are the top mistakes.

Mistake #1: Misreporting Income

If you work as a freelancer, you may get 1099s from various sources. It’s easy for one to go missing. Make sure your records match up to what you’ve received. Even more confusing is that some companies won’t send a 1099 if they pay you under $600. However, it’s still your responsibility to ensure you accurately report any income, even a few dollars.

Keep a spreadsheet of payments as they come in so you can tally totals for different sources of revenue and make sure you aren’t missing anything. The IRS uses their computers to match what you report with the 1099s they’ve received, so any inconsistencies are likely to trigger audits.

Mistake #2: Forgetting Payroll Taxes

If you have employees, you’re responsible for pulling out taxes and paying them into the system quarterly. If you aren’t withholding FICA, which is medicaid and social security, federal income tax, state and local income tax, then you may incur penalties.

The IRS estimates it collected just under $5 million in payroll tax penalties, including fines for misclassifying workers as independent contractors when they are not. Research what’s due, put it in a separate account and pay it on time every time to avoid issues.

Mistake #3: Deducting Too Many Expenses

You may have taken that trip to Nashville, Tennessee 100% for business, but that doesn’t mean you can deduct every cent you spent. People often mess up by taking the full amount of their meals as expenses or including spouses and children in the equation.

When it comes to business expenses, study how much you can actually deduct and always keep business and pleasure separate. If your family goes with you, rent a separate room that you pay out of your personal account. Pay for your meals on the business credit card and the family meals on a personal card. Don’t leave any room for misunderstandings or mistakes.

Mistake #4: Not Maintaining Cash Flow

It’s easy to grow so frightened of making a mistake or triggering an audit that you set aside or send in far too much money for taxes. Around 33% of business owners cite cash flow as their greatest challenge while seeking success.

Rather than overestimate, enlist the help of a tax professional to find out exactly what amount you need to pay into estimated taxes. Keep aside enough to pay quarterly taxes and keep enough to maintain cash flow.

Mistake #5: Skipping Home Office Deduction

Do you work out of your home? You may feel reluctant to take a home office deduction for fear of triggering an audit. As long as you use the space for only business, you can take the deduction. Even if you get audited, you’ll just provide photos or access to the space to show you don’t use it for personal reasons.

Do be aware of limits in case you ever sell your home so you don’t wind up owing money later, but the home office deduction can be an excellent way to lower your tax burden legally.

Invest in a Tax Professional

While there are many things you can do on your own to avoid tax errors, it’s wise to consult a tax specialist to ensure you didn’t miss any deductions or make glaring mistakes. There’s no need to pay more than necessary, and no reason to fear tax time.

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Eleanor is editor of Designerly Magazine. Eleanor was the creative director and occasional blog writer at a prominent digital marketing agency before becoming her own boss in 2018. She lives in Philadelphia with her husband and dog, Bear.