Published on 8/18/2015 12:00:00 AM
Business tax compliance is one of the most important aspects of running your business. Unfortunately, one small mistake in your tax filings can lead to an audit. Because of the high risk of business tax fraud, the IRS reviews the following common tax reporting errors with a careful eye.
Here are five common mistakes related to filing forms 1099 and W-2, which must be avoided at all costs:
- Failure to File
- The easiest way to invite IRS auditors into a business or home office is to either ignore the obligation to file or submit forms 1099 and W-2 untimely. The penalties associated with late filing can be quite damaging to a small business. Once January 31st comes around, the clock stars ticking for the various fine amounts, which start at $30 per late form up to $200,000 for a complete failure to file by August.
- Poor Recordkeeping
- The IRS gives American business owners many opportunities to reduce their tax burden and keep more money in the bank through deductions, write-offs and miscellaneous tax breaks. Taking advantage of this relief requires proper record keeping for the purpose of proving entitlement. To this effect, it really pays off to retain the services of a CPA, tax preparation professiona or bookkeeper.
- Misreporting Income
- The number of small business owners that overstate their income in the United States is staggering. The most common mistake in this regard is to look at sales revenue without considering sales tax and other expenses that can be instantly subtracted. Under-reporting income is an even more egregious mistake that will surely cause red flags to go up at the IRS and invite auditors to take a closer look.
- Incorrectly Classifying Workers
- There are four general categories of workers: common employees, statutory employees, statutory non-employees, and independent contractors. Business contractors do not get W-2 forms and should not be included in a payroll; however, one of the gravest errors in business taxation is to assume that a common employee can be arbitrarily paid as an independent contractor for the purpose of trimming the payroll.
- Improperly Calculating Meal and Entertainment Costs
- Not all business expenses related to travel, gifts, entertainment and meals will qualify as deductions when filing an annual tax declaration. There is also an important limitation to keep in mind, and it is generally 50 percent; however, this only applies to expenses incurred while traveling away from home, which means that going to a nightclub may apply while buying lunch for employees at the home office might not. Not all expenses incurred during a business trip may qualify; it is important to allocate and itemize on a reasonable basis.