Do you own your own business? Do you also prepare your own taxes? If so, you could unknowingly be exposing yourself to serious tax penalties. Making any number of mistakes with regards to deductions, worker classifications, or even compensation, could get you in hot water with the IRS. If you underpay your taxes or provide inaccurate information, you could pay substantial interest and fines. There are a few errors that are common among business owner tax returns. Here are some of the most prevalent mistakes that you should look to avoid:
Deducting too much mileage. One of the benefits of owning your own business is the number of deductions you can take every year on your taxes. In many cases, as long as an expense is business related, it can be deducted. However, there are certain rules about how and when a deduction is appropriate.
One deduction that is commonly misunderstood is the mileage deduction. Generally, you can deduct mileage on your taxes if the trip in question is business related. However, there are some exceptions. For example, a simple commute from your home to your office is generally not considered deductible. If you deduct every mile you drive in your car, your tax return could raise some red flags and you could put yourself at risk of being audited.
Deducting personal vacations. Travel expenses can often be deducted as long as the trip is business related. Some business owners will include a business meeting into a personal vacation to make the trip a deductible expense. However, the IRS has rules in place to prevent people from exploiting the business travel deduction. For instance, generally, you can only deduct those expenses that are related to the actual business portion of your meeting.
If, for example, you take a week vacation with your family and have one meeting with a client during the trip, you probably wouldn't be able to deduct expenses for the entire trip. Rather, you may only be able to deduct expenses for the day that you met with the client. Again, if you take advantage of this deduction, you could make yourself vulnerable to audits and penalties.
Classifying workers incorrectly. You may have a mix of full-time and part-time workers and even independent contractors. How you classify them can have a big impact on your taxes. For example, if you classify a worker as an independent contractor, you may not have to pay their payroll taxes. Of course, if you do classify them as an independent worker, the IRS will likely want to make sure you are treating them that way. Independent contractors can often set their own hours, follow their own dress code, and even do work for your competitors if they choose. If you're not giving them those opportunities, the IRS may not agree with you that they're independent contractors.
For more information, talk to a business tax preparation service (such as Bauer & Associates LTD). They can help you prepare your taxes and avoid these mistakes.