As an independent contractor or small business owner, staying on top of your tax obligations should be a top priority. This can be challenging when you do receive a W2 form and have to rely on your own understanding of local, state, and federal tax rules and requirements. To avoid IRS tax issues such as audits or having to pay back taxes and penalties, the following are five common mistakes you need to be aware of:
1. Not reporting all income. According to an April 2017 USA Today report on small business taxes, the IRS is well aware of how easy it is not to report income. If your business is cash heavy, you may face an increased likelihood of an audit. Likewise, if you get payments from any source totaling $600 or more, be aware that it will be reported to the government. To avoid penalties, make sure to include these amounts as income.
2. Going overboard with deductions. In order to reduce your tax liability, there are a generous amount of business expenses you are entitled to deduct. At the same time, claiming excessive amounts could put you on the Internal Revenue Service’s radar. Make sure you are familiar with the IRS rules for business deductions and keep separate accounts to avoid mixing personal expenditures with those of your business.
3. Consistently showing no profits. For example, if you run a photography business that only makes limited amounts of money each year from a small number of customers while deducting the entire cost of your equipment and travel expenses, it could be looked at as more of a hobby than a legitimate business interest. Any company that shows losses for multiple years in a row is likely to be scrutinized more closely by the IRS.
4. Claiming your home office. While you can write off a portion of your mortgage, utilities, repair costs, and depreciation if you use a home office in the course of your business, be aware that the space you are claiming has to be set aside exclusively for that purpose. If your office doubles as a guest room, it would not apply. The same goes with your car if you use it for both business and personal use, though you may be able to claim mileage deductions.
5. Not keeping thorough records. Recordkeeping is essential, not only for avoiding problems with the IRS but also for ensuring the success of your business. Keep records and receipts of all payments and expenses so that can show proof of anything you claim on your tax return.
If you have concerns about IRS issues pertaining to your small business or have been notified of back taxes and penalties you owe, contact the Law Offices Of Eric G. Zelazny. Our passionate Tinley Park tax issue attorneys can provide the professional legal guidance you need in these situations to help ensure your rights are protected. Call or contact us online today and request a consultation.