One of the most unpleasant aspects of running a business is filing taxes. Doing it properly, however, is imperative in avoiding an audit and penalties.
This entails more than just reporting all your income and filing on time. In addition, follow these five tips to prevent making a costly mistake.
1. Keep clear records
Start off on the right foot by keeping clear records throughout the year. Audits often occur due to making mistakes, and you are less likely to do so if you have accurate, up-to-date, organized financial records for all business transactions. Be sure to set strict boundaries between personal and business affairs to avoid blurring lines and grabbing the attention of the IRS.
2. Classify employees correctly
Sometimes, it is clear to differentiate between a regular employee and an independent contractor. Other times, the distinction is not so obvious. Misclassifying them will cause you to file your business taxes incorrectly.
3. Know your deductions
Through professional assistance, you can find out which deductions you qualify for. Here are a few examples:
- Home office
- Vehicle and cellphone usage
- Retirement plans
Note that deduction requirements may change year to year, so be sure to double-check them every time you file. Also, be careful with expenses from traveling and eating out, as the IRS is more likely to question these business deductions.
4. Focus on the bigger picture
Another thing to do is make business decisions based on goals and the best interest of the company, not solely on the tax effects they will have. The latter route may save you money on taxes now but cost you more in the long run in other ways.
5. Set aside money for taxes
Businesses have to file taxes more often than households do. Make sure you always have enough money to pay for taxes. It can be helpful to set some aside in a separate account to prevent using it all.