3 Common Mistakes Sole Proprietors Make On Their Taxes
Do you run your own business? There are many ways you can set up your business, but a sole proprietorship is often the simplest, especially if you don't have employees or complicated business arrangements. As a sole proprietor, you can file your business taxes on your personal return. That can simplify the reporting process and make it easier for you to file your returns.
However, even if you file as a sole proprietor, there are still a few tax complications to consider. Many sole proprietors fail to plan for tax issues, and that can create some serious headaches.You can avoid some of the most common pitfalls by planning ahead and by working with a tax preparation professional. Below are a few common mistakes to avoid:
Failing to pay quarterly taxes. Personal taxes may be due once a year, but businesses don't get that luxury. Even if you're a sole proprietorship, you're expected to file and pay taxes on a quarterly basis. Unfortunately, many business owners fail to do that. If you don't pay quarterly taxes, the IRS can charge penalties and interest, and even levy your wages and place liens on your assets. Work with a tax professional to plan your quarterly amount due. They can provide an estimate so you can set aside money to pay your taxes each quarter.
Under-reporting income. Many business owners make the mistake of under-reporting their income. Sometimes it's intentional, but it's often an accident. The IRS is usually forgiving about this mistake and will assume it's an error unless there is strong evidence that it was intentional. However, even if it is an accident, you'll still owe taxes on the under-reported amount, along with any penalties and interest for not paying on-time. You also may have to deal with the stress of going through an audit.
Not tracking expenses. One of the benefits of being self-employed is that you get to deduct most of your expenses, including mileage, materials, software, and even your home office. These deductions can significantly reduce your tax liability. However, you have to be able to track and prove that the expenses actually occurred, especially in the event of an audit. Many business owners fail to track their expenses properly. As a result, they deduct too few expenses from their return. The other issue is that some sole proprietors deduct too much, which raises red flags and triggers an audit.
You can avoid these issues by working with an experienced tax preparation professional on your 1040 Tax Preparation for Sole Proprietors. They can help you plan your taxes, prepare your filings, and stay out of trouble with the IRS.