3 Things a Tax Analyst Says Small Business Owners Get Wrong

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As they say, there are only two things certain in this life: death and taxes. Grim, but true. So, it pays (sometimes literally) to have all your ducks in a row. Especially when you work for yourself as a small business owner. And let’s be honest: We would all love to lower our tax bill. That’s why we’ve partnered with H&R Block and tax analyst Brittany Benson for the three things she thinks small biz owners and gig workers need to know when tax season rolls around. But don’t worry—she won’t leave you hanging. She’s also shared three pro tips for how to make things right.

Meet the Expert

Brittany J. Benson, Esq. is a lead tax research analyst in The Tax Institute at H&R Block. She has nine years of tax experience and specializes in the tax issues that affect individuals, international taxpayers and small business owners. Brittany is also a licensed attorney in the state of Missouri.

What Are the Top 3 Things Small Business Owners Get Wrong When Filing Taxes?

1. Failing to Pay SE Tax/Payroll Tax Throughout the Year

“One thing small business owners, especially those who are new to owning their own business, may get wrong is their self-employment tax obligations. Throughout the year, self-employed taxpayers must estimate their quarterly income and make payments, or they may face penalties come tax time,” says Benson.

“Another quarterly item that’s sometimes overlooked is quarterly payroll obligations when a small business has employees. These include making quarterly federal withholding payments and unemployment payments (depending on the state the business operates in).  Failing to keep up with these payments can result in penalties for the business and can affect your employees’ tax filings. Plus, you may need to send your employees W-2s for the year or 1099 forms for contractors.

“Block Advisors can assist with self-employment, payroll and 1099 filing obligations. Find out more at Block Advisors Payroll Services. For a DIY option, you can check out Wave.”

2. Missing Deductions for Expenses

“An item we see many questions about each year is ‘what can I deduct for my business?’ The answer is always—it depends. Business expenses are generally deductible if they’re ordinary and necessary for the business or industry. This means that what’s considered deductible for one business won’t necessarily be deductible for a different business. For example, if you own your own cleaning service, the expenses you may be allowed to deduct could include cleaning supplies and other equipment you use in your business every day. However, if you own your own tutoring business, your deductible expenses may include things like books and supplies you use to tutor your students.

“Whether an expense is deductible can be a tough call, but the experts at Block Advisors can assist with determining if your expense will be deductible for your business. Visit the Block Advisors resource center for more information on deductible expenses.”

3. Failing to Track Expenses and Income

“One major mistake can be failing to separate business income and expenses in separate accounts from your personal expenses and failing to keep good records. One of the most important things a business should do is keep separate accounts for their personal and business expenses in separate checking accounts. Intermingling funds can cause major headaches at tax time.

“Another item we see is when a new business doesn’t keep accurate records of their business transactions. There are many tracking software and apps available to use for this. And again, Block Advisors can assist you with tracking expenses if you’d like a human to take care of it.”

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What Are Your Pro Tips for a No-Stress Tax Season?

1. Know Your Obligations

“The best thing a business owner can do is be aware of all their tax obligations when they start operating their business. This includes many things like making the right entity selection (sole proprietor, corporation, S corporation), submitting the annual filings required for each business type, and understanding self-employment tax requirements. Don’t forget state requirements for businesses can vary, so you’ll need to make sure you’re following the rules for your state,” cautions Benson.

“The best type of entity for your business may depend on many factors, not all of them are tax-related. You may want to speak with an attorney to determine the right entity for your business. Block Advisors can help you understand the differences between various entities so you can make the best choice for your specific situation.”

2. Track All Items Related to Your Business

“As described above, tracking your business expenses and income can help with paying SE tax and with year-end tax filing. Using an app to scan all receipts, categorize expenses and track income can help you better understand how the business is earning and spending money. This can really make a difference in your tax obligations, especially to prevent you from underpaying SE tax and making sure you take advantage of all deductions available.

It’s smart to sit down monthly (or more often) and plan out the next few months of business income and expenses as best you can. That way, you’re estimating accurately and can be prepared when you pay SE tax quarterly.

“Setting up separate accounts from the start is also a prudent business move that can help keep you organized for tax season. If you haven’t already done this, don’t worry, the tax experts at Block Advisors can help new and existing businesses get their expenses and income on track and help plan for the next quarterly requirement, whether it’s for SE tax or payroll tax for employees.”

3. Stay Up to Date on Tax Changes

“One good way to set yourself up for success is to stay up to date on tax changes that could affect your business. Reviewing IRS announcements and other guidance can help you keep your business on track. Knowing what’s coming can help you better plan for things like acquiring new assets, expanding or hiring more employees.”