What are some of the most common small-business errors in preparing tax filings and how can I avoid them?

Small businesses make a number of common errors. While a qualified tax professional should be able to help you address most of them, it is always advisable for you to review his or her work with a few of these items in mind. Below is a partial list of some of the most common errors, though it is by no means exhaustive:

• Failing to submit payroll taxes on a timely basis. Despite whatever cash flow issues your business may be having, withheld employee payroll taxes should be segregated from operating funds. Even temporarily using this money to fund operations could begin to dig a hole for the business from which it will be hard to emerge.
  
• Treating employees (or yourself) as independent contractors. While it may be simpler to count some workers as independent contractors, they may not qualify. If you provide your contractors with clear direction and a place and tools to perform their work and they work only for you, you likely need to count them as employees (the IRS' test is considerably more involved). Also, don’t be tempted to treat yourself as an independent contractor just to gain a few more deductions. An owner who works in the business is generally an employee.
  
• Taking salary as dividends if you are a Limited Liability Corporation (LLC), which are normally taxed as partnerships in which case salaries and dividends are irrelevant. or S Corporation. Since only wages and not dividends are subject to payroll taxes, owners of S Corporations and LLCs can be tempted to not pay themselves a salary—either in part or in full—and take profits from the business as dividends. The IRS takes a very dim view of the practice and wants to see evidence that owners are taking a fair market wage for their work in the business.
  
• Categorizing business meals and entertainment as advertising. Meals and entertainment are a primary means of promoting and advertising for many small firms. However, only half of these expenses are deductible, while traditional advertising is 100 percent deductible as a business expense. While this tax treatment is clearly unfair, it is important to keep the distinction. This is an area under close IRS scrutiny.
  
• Keeping inadequate records. It is particularly important to keep records that demonstrate the business use of certain “mixed use” assets (those used for both personal and business purposes). Examples of such assets include boats, home computers, mobile phones and other wireless devices, automobiles, and vacation homes. Since the IRS will assume all such items are for entirely personal use unless otherwise demonstrated, it is important to keep clear records and logs. Also, most meals, travel, gifts, and other entertainment will be deemed personal unless you have records to show otherwise.
  
• Failing to list all 1099 income on the appropriate schedules. Make sure that all forms of income are reported discreetly and as specifically requested on the schedules; different forms of income are reported on different schedules, such as interest on Schedule B and sale of securities on Schedule D. Also, non-employee compensation should not be included with wages.

Disclaimer: The National Small Business Association is in no way providing tax advice. The organization only is providing information. Before filing your tax return or proceeding with any official action, please consult a tax professional.