t’s easy to forget about Uncle Sam when you’re in the midst of day-to-day operations, says financial consultant Angie Mohr, but making tax mistakes can be costly for your small business. To help prevent hearing the knock of the IRS at your door, she advises paying close attention to these five common tax-centric mistakes:
1. Failing to Send 1099s. As a small business, the IRS requires you to issue information forms to certain individuals and partnerships that you have paid throughout the year. You must fill out and remit 1099-MISC slips to both the IRS and the payee for cumulative annual payments over $600 for services, rents, awards and prizes, and certain other payments. The 1099s must be sent out to payees by Jan. 31 of the subsequent year and to the IRS by Feb. 28 (for paper filers) or March 31 (for electronic filers). Penalties for not filing on time range from $30 to $250 for each 1099-MISC you’re required to send.
2. Mixing Business and Personal Expenses. The IRS is particularly interested in ensuring that only business-related expenses are being deducted for tax purposes, and not doing so can get you into hot water. Open a separate bank account for your business to keep monies apart. Keep detailed records of business purchases and of any business use of personal assets, such as a car or a home office.
3. Losing Track of Receipts. When you’re busy, it’s easy to stuff purchase receipts into your wallet or pants pocket, never to be seen again. However, you can’t deduct what you don’t document, and you could end up paying more taxes on your business income than you need to.
4. Getting Behind on Payroll and Sales-Tax Remittances. Cash-strapped business owners often have to juggle their finances to make sure the bills get paid. This can create a huge temptation to use money collected from sales tax and payroll to temporarily support operations, which can lead to filing returns late and owing funds to the IRS. The government treats these funds very seriously and considers them to be held in trust. They should be deposited in a separate bank account and remitted on time to avoid penalties and interest. Collecting taxes and not remitting them can, in extreme circumstances, lead to criminal charges.
5. Not Reporting Barter Transactions. Barter transactions—goods and services provided in exchange for other goods and services—must be treated as taxable business income when they relate to the business you are in. They are valued at the cost of what is being received.
Paying attention to your business’s tax situation can save you the grief of an audit and, potentially, a significant amount of money. If you’re unsure about how to handle a transaction, talk with your accountant to get it handled the right way.