The Top Five Tax Return Mistakes and How to Avoid Them

Photo by  Hutomo Abrianto

Written by Luke Frye

Illustration by Paco de Leon

Okay, this is going to sound extremely biased... but, as an accountant, I strongly recommend hiring a professional to file your business’s tax returns.

Sure, you’ll have to part with some of your hard earned cash in the short term. But I guarantee it will save you time and headaches. And if it helps you avoid making costly errors on your tax return (y’know, the ones that result in IRS fines), it’ll also save you money in the long run.

That said, I’m aware that it’s not always possible to hire a pro. So, if you’re doing your own tax return this year, here are some common mistakes to avoid.

Mixing up personal itemized deductions with business deductions

Schedule A on your 1040 is for personal deductions. This is what you use if you don’t take the standard deduction which is the simpler method. If you own a home, live in a state with income tax, or have large medical bills, you’ll likely itemize rather than take the standard deduction.

Schedule C on your 1040 is your “business tax return” for your sole-proprietorship or Single Member LLC. This is where you report your business miles, home office, and other ordinary and necessary business expenses with your income from that business.  

Not paying yourself a salary if you’re an S-Corp

Many people opt for setting up an S-Corp. This can be a tax advantage for some people, but it also comes with lots of additional compliance requirements. One of the most common mistakes is  not paying yourself a “reasonable salary”.  A reasonable salary is based on a combination of things including your revenue, distributions, and market data. Paying yourself a reasonable salary is required,  instead of taking everything as a draw like you would with a sole prop or plain ol’LLC, you’ll need to have payroll software like Gusto, and pay your payroll taxes (which are separate from your 1040-ES or “quarterlies” you may pay for income tax).

Ignoring retirement

A SEP account is one of the simplest ways to get a deduction and set money aside for your future. Roth and Traditional IRAs are also good, and you should work with a financial planner to balance these all out. The huge advantage to a SEP is that you can contribute over $50k (if you meet the requirements) by the extended due date of your return. That means you could make a 2018 contribution in October of 2019.

Not deducting things because you’re afraid of an audit

You are running a business. You have expenses that are legit. Take advantage of what’s rightfully yours and deduct as much as you can—especially things like mileage, home office, and business travel. As long as you’re maintaining proper documentation and not doing anything illegal, there’s no reason to worry about an audit. Make sure you have all your records in place and an audit will go much better. There is always a chance you could be audited, regardless of what you deduct, how much you made (or lost), and what industry you’re in.

Not having proper bookkeeping for your business

If you have a business, you can get by without having a lot of things, but if you’re planning to make this your full-time thing to grow and rely on it, you need to take care of it like, well, a business. This means you need financials. You might call this “bookkeeping”, and at the very least, you should have your business income and expenses organized monthly in an accounting system. The two softwares I recommend as acceptable are Xero and QuickBooks Online (AKA QBO). QuickBooks Self-Employed (AKA QBSE) and Freshbooks are not accounting systems, they are expenses tracking and invoicing softwares. There’s a big difference and you may as well pay the same amount and get a full system with Xero or QBO.

Bad bookkeeping substitutes cartoon by The Hell Yeah Group

tl;dr: Busy? Here’s the bullet-point version of this post

  • Know how to differentiate between personal and business expenses (and file them correctly)

  • Pay yourself a salary if you’re an S-Corp making money

  • Find out how to use retirement contributions as tax savings

  • Claim every legit deduction you possibly can (and keep proper documentation)

  • Use Xero or QBO for your bookkeeping (and do it!)

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Luke Frye is the founder of Timber Tax, a tax filing service for creative professionals and small business owners. Got a question about tax filing? You can book a call with him here.