Common Mistakes Made By Self-Employed Taxpayers
Self-employment has its advantages and disadvantages. On one hand, you are entitled to tax deductions and can make an unlimited amount of income. However, on the other hand, you may need to file taxes on your own which if neglected can drastically harm your personal and professional life.
If you’re a small business owner or a self-employed tax owner, you want to avoid making mistakes on tax returns as you may end up owing more taxes or worse, invite an IRS audit. While it is essential to learn how to manage taxes on your own, the safe way to go about this process is by hiring a certified tax professional to ensure accurate tax filing.
At John P. Jones Inc., we want to minimize your tax liabilities. To keep you in compliance and save you from expensive tax errors, we have listed the top five mistakes frequently made by self-employed taxpayers.
1. Not communicating regularly with your CPA. If you’re a freelancer or a small business owner, chances are your income is uneven. Some months you may earn more than others making it difficult for you to figure out the correct amount of taxes to pay. Too often, taxpayers make estimated tax payments that they or their accountants set up. The big surprise then comes the following spring when you find out that you owe quite a bit. Maintaining contact with your CPA throughout the year would help adjust tax payments and avoid penalties. Also, make sure you tell your CPA before you make a significant transaction, such as selling investment property. A conversation that lasts a few minutes could save you thousands.
2. Waiting too long to prepare taxes. If you’re a small business owner, your taxes will take more time to prepare than a W-2 employee. If your returns need bookkeeping, and most do, walking into your CPA’s office in late March or April does not give the CPA enough time to prepare your returns. Bookkeeping should be a year-round task.
3. A shoebox full of receipts. Business owners who hand their accountant a year’s worth of receipts in a shoebox or shopping bag are guaranteed to be paying a larger than the necessary fee to compensate for the extra time to organize and calculate the receipts. Save a little money by checking with your accountant ahead of time on the format that he or she would like to see the information displayed on.
4. Not taking deadlines seriously. The penalty for filing and paying late on a personal tax return is 5% a month, up to five months for a total of 25% of the tax owed. S corporations owe no federal corporate tax, but if a return is late, the penalty is $195 per month for up to twelve months for a maximum of $2,340. And this is per shareholder. If there were two shareholders, the maximum would be $4,680. As you can see, a missed deadline can be very expensive.
5. Not paying estimated taxes. Failure to pay all of your estimated taxes creates two problems. First, there is a penalty for failing to make estimated payments. You can avoid the penalty if your estimates are equal to 90% of the current year's tax or if you pay estimates equal to 100% of the prior year’s taxes. The second problem, of course, is that you are given a massive bill when your taxes are done. Moreover, it may be a bill you can’t possibly pay. You would be forced to negotiate an installment agreement with IRS while also making an estimated payment for the current year. And you may have to pay your accountant to do that.
If you’re looking for a certified public accountant in Chicago, IL, consult John P. Jones Inc. We are a full-service business consulting and advisory firm with more than fifteen years of experience. We provide tax preparation and planning, business accounting, strategic planning, tax resolution services and retirement planning to clients across Park Ridge, Oak Park, Cicero, Lincolnwood, Evanston, and Kilbourn Park. We take pride in helping small business owners in their accounting and tax needs.