For many small business owners, taxes are a perennial frustration. The Internal Revenue Service doesn’t make anything simple, and the risk of getting hit with penalties and fees is high if you don’t know what you’re doing.
Very simply, unless you are a tax professional, no small business owner should be doing their own taxes. Does this reflect reality? Of course not! There are many reasons why you might be doing your own small business taxes—perhaps an accountant is not in the budget for now or you haven’t found one you trust.
Lots of small business owners do their own taxes. Here are some ways you can better ensure that you avoid the ire of the IRS.
You need to know how your business is structured for a number of reasons, but one of the most important is because how you categorize your company has an enormous influence on how the IRS views your business.
“Your business structure determines what federal taxes you must pay and how you pay them,” the Small Business Administration advises. “Some of the taxes require payment throughout the year, so it’s important to know your tax obligations before the end of your tax year.”
The IRS recognizes several business structures, each with different requirements and benefits. If you work for yourself and have no other employees, you could opt for a sole proprietorship. In other cases, you would want to structure your business as a corporation or be a limited liability company (LLC).
If you’re accustomed to how the IRS treats most waged workers, you may be surprised by how complex the system is for small businesses. There are dozens of possible deductions and credits, which are supposed to protect you from paying tax on stuff you bought for your business.
The range of what is deductible is huge, from meals with potential clients to equipment to a home office. However, the IRS follows lengthy rules. One of the easiest ways to get yourself audited is if you are slaphappy with your deductions.
“Under the tax law, most expenses incurred in business are deductible, while most income is taxable (there are, of course, some exceptions),” writes Elizabeth Wasserman of Inc. Magazine. “The tax law gives you options on when and to what extent you claim certain deductions or report income.”
You should be aware of these rules at all times, then you can keep track of your deductions throughout the entire year.
The first rule you should know about deductions is that the IRS requires you to keep records; therefore, keep track of the receipts for anything related to your business. These detailed records will make April far less anxious and give you some grounding in case an audit is headed your way.
“If you wait almost until the deadline, you’ll feel rushed,” says Sally Herigstad of TaxAct. “The best reason not to wait until the end of the year to catch up on recordkeeping, however, is that by keeping good records and paying attention to them, you can use the information you learn to for better tax planning—not to mention better business strategies.”
Ingrain a good recordkeeping habit into your life, not just for the IRS but to better understand your business.
If you are concerned your records are too complicated or you’re still afraid of running afoul of the IRS, then you should invest in an accountant. While a CPA is no guarantee that you won’t be audited, hiring someone qualified is your best defense.
Additionally, as your business grows, you will probably want an accountant to save you time and headaches.
“The more successful your business is, the more complicated the tax filing will be, which leads to more opportunities for mistakes,” David Rae wrote in Forbes.
In the end, being misleading on your taxes can be devastating to your company.
“You could sink your business,” CPA Richard Colombik told Inc. “It might put you in a position where your profitability is so small that it is not worth the effort that an entrepreneur has to put in to run their own company. They might be better off getting a job working for someone else.”
Fortunately, there is a whole cottage industry of tools meant to help small business owners do their own taxes. Many of the major tax preparation services, like H&R Block and TurboTax, offer some form of free filing services through the IRS.
Some of the best products out there, like Sunrise Bookkeeping, help you track potential deductions and other financial matters throughout the year, taking some of the sting out of tax time.