3 Big Tax Mistakes For Sole Proprietors

Do you own your own business? Are you the only owner and only employee? If so, you probably wear many different hats. You're the salesperson, customer service rep, and possibly even the person who makes the products. You also may be the bookkeeper and the head of marketing. It's a lot of responsibility for one person, so it's easy to make mistakes or miss important items.

One area where you don't want to make a mistake, though, is your taxes. For a small business owner, a tax mistake can be costly and could even threaten the business's chance for survival. You could face penalties, interest, and much more as you pay off your tax debt. Below are three common tax mistakes that sole proprietors make. If any of these sound familiar, it may be time to get some help from a tax professional:

Not filing quarterly returns. When you are an employee of a company, your employer withholds taxes from each paycheck. This means you file your return in April, most of your taxes for the year are already paid. However, when you are the employer, it's your responsibility to pay taxes on an ongoing basis. In fact, you're supposed to file returns and pay taxes on a quarterly basis. By paying taxes quarterly, you avoid a nasty surprise when you file your annual return in April. If you fail to pay your quarterly taxes, you could face interest and penalties, which could significantly increase your tax bill.

Reporting your income too low. Do you work for clients who issue you a 1099? If so, resist the urge to under report your business income. Many sole proprietors think they can reduce their tax bill by simply leaving certain income off their return. However, if the customer or client issues a 1099, you can be certain that the IRS has a record of your income. It may take them time to put it together and notice the discrepancy, but eventually they will do so. They could charge you penalties and interest on the under reported amount or they could even audit you. Either way, you could pay significantly more than you would have had to in the first place.

Taking too many deductions. One of the benefits of being self-employed is that you can deduct most of your business expenses. This can reduce your taxable income and your tax bill. However, be careful not to deduct more than is appropriate. The IRS pays careful attention to returns for self-employed individuals. If your deductions are so high that they reduce your income down to zero or a substantially low figure, the IRS may take notice and audit your return. As a rule, don't deduct anything unless it is a legitimate business expense and you have documentation.

Do you think you've made some of these mistakes? Or do you want to avoid them in the future? If so, you may want to consult with tax professional who can help you file your taxes. Contact a tax service in your area today.

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