Individuals with income from employment, investments and even gambling have to file income tax returns. Frequently, employed individuals qualify for income tax refunds because they paid more than they needed to toward their federal income tax obligations for the year. Others may have to send in substantial payments.
Small business owners are among those who may discover they underpaid their taxes. They are also at risk of an assortment of different tax controversies. Seemingly minor mistakes by small business owners can result in major implications for their income tax responsibilities. The following are some of the most common errors small business owners make regarding income taxes.
Failing to make estimated quarterly payments
Unless it is the first year an individual operated a business and was self-employed, they have to make estimated tax payments throughout the year. There are quarterly tax payments due in January, April, June and September. Each quarter, small business owners and other self-employed professionals submit estimated tax payments to the Internal Revenue Service (IRS) and state tax authorities. Failing to make those quarterly payments can lead to a large balance due when the business owner files their income tax return. They may have to cover penalties in addition to paying their basic tax obligations.
Commingling business and personal finances
Small business owners may have a variety of tax credits, write-offs and deductions available both at the business level and the individual level. They may also have a variety of assets they control for personal use and the benefit of their businesses. Unfortunately, it is very easy for those operating small businesses to make mistakes regarding how they separate their finances and what credits or deductions they utilize. Especially in cases where the separation between their financial resources and the business’s finances aren’t clear, they could be at risk of tax controversies related to how they claim and pay taxes on their resources.
Errors regarding employee income taxes
Businesses can sometimes end up facing financial penalties and possibly allegations of misconduct if they fail to properly withhold and deposit estimated income tax obligations for employees. Errors can lead to workers facing large tax debts when they file their taxes. The company could also incur tax debts due because of the employer’s mandatory contributions.
Learning more about the income tax rules that apply to small businesses can help business owners avoid mistakes that can lead to audits, large tax debts and even criminal charges. Proactively complying with business tax regulations is crucial for those operating successful small companies.