Taxes can easily be one of the most complicated and painful subjects to learn, let alone try to understand. With the tax code constantly being amended and updated and reaching nearly 4 million words, it is no wonder why many taxpayers choose to outsource their bookkeeping and tax preparation to avoid tax mistakes.
The fear of making a mistake on your taxes is a legitimate fear. You could be paying too much, or even worse have to deal with the IRS if you pay too little.
Even under the best of circumstances, mistakes can and do happen. The last thing you want while running your digital marketing business, is to run into to tax mistakes. The IRS will not only take your money, they will take your time. An audit is far more time consuming than identity theft.
Fortunately, most tax mistakes are completely avoidable. To help the business owner or CEO who is too busy focusing on driving revenue and operating the business, we’ve put together our thoughts on tax mistakes and which to avoid.
The Number One Way to Minimize Mistakes Altogether
Tax mistakes are more common than you might think. Especially when you consider that many seemingly simple instructions are interpreted very differently by service providers. Even seasoned professionals can overlook, miscalculate, or overstate numbers on the tax forms.
So before even thinking about how to handle mistakes, we want to encourage all businesses, especially those who are fast-growing businesses that focus 80% of their energy on sales and operations, to mirror our process for limiting mistakes, by getting a review.
We have all our returns go under peer review, and I’ve been surprised at the small mistakes and opportunities that would have gone undetected. Getting a second opinion is something a reasonable person does with their health, buying a house, and even buying a car. Yet, many business owners will let their company and personal income taxes go unscrutinized because it feels inefficient. If you read nothing else, do this find a reputable online or local tax advisor and ask them for a tax return review. Try Upwork if you need to. This is especially important if you’ve been with the same firm or a solo shop preparer for multiple years. Reviews aren’t free but it’s money well spent to know you’re not missing out on big tax swing.
When you do make a mistake and the IRS catches it, you’re on the defense. The IRS hotseat isn’t a fun place to be. You want to put them behind you and get back to running your business, a review allows you to spend minimal time on your return while maximizing the potential benefit. A tax professional can review for mistakes exponentially better than you can. But if you also want to learn how to review common mistakes on tax returns, read on.
Miscalculations are one of the most common tax mistakes that can invite the extra scrutiny of the IRS. Even if math isn’t your thing, you can still take your time and double, even triple check your work. Most tax software programs are pretty good at catching miscalculations, however the more complicated your tax situation is, the better off you are getting a second opinion from a tax professional. Some tax scenarios that may warrant a second opinion include: itemizing, taking business tax credits (such as the R&D tax credit), or calculating the 199A deduction. Remember, nothing is foolproof, even your tax software, which is why going over it with a second opinion is a good idea.
Include All Income
Omitting income be it accidental or intentional is a big no no as far as the IRS is concerned. The IRS requires that all income be reported. This includes income you would earn from an employer, self employed income, and 1099 income. Since digital marketers receive a lot of 1099 income, it is important to note that the 1099 you receive is also reported to the IRS. It is important to make sure that not only does your 1099 income get reported, but reported accurately. Any discrepancy can be a red flag for an audit.
1099 Red Flags
If you use services like bill.com or paypal, then you will receive a 1099k. 1099k’s report gross revenues, not what is paid to you. Because of this, you will need to report your gross transaction volume on your tax return. Then deduct any commissions, fees, and adjustments paid to the platform.
One of the most important things when it comes to 1099’s is that the gross revenues reported on your tax return are either equal to or greater than the sum of all 1099’s received. Reporting less, even if it equals the actual amount paid to you will result in a notice of proposed adjustment. It is also important to make sure you report the 1099 income to the correct payee. For example, if you have a S-Corporation but receive a 1099 under your tax ID number, you will need to personally report the income. Often times, marketers combine their revenues together, placing that income with their S-Corporation return. This will trigger missing income to the IRS. To avoid this the personal income needs to be reported on your personal return to acknowledge the 1099. Then a deduction for the same amount is taken from the S-Corporation to zero it out. The tax result is the same, but the added step is necessary to avoid any confusion for the IRS. To prevent future confusion, make sure you update you tax ID with all of your clients and vendors to reflect the correct filing entity.
In addition, if you will also be issuing 1099’s it is important to make sure they are sent out by the deadline of January 31 in order to claim deductions for the 1099 contractor payments you are making. The IRS can and will reject contractor payment deductions where a 1099 was required by not issued.
Double Check Numbers and Signatures
One of the most frequently overlooked things are a tax return, is the taxpayers social security number. This is a simple mistake that happens more than you would think, and in fact is one of the most common tax mistakes according to the IRS. In addition, missing signatures is another common mistake. It is important to note, that a tax return that isn’t signed is considered invalid according to the IRS. If you are filing a paper return, make sure you sign it. And if you are having a tax firm file on your behalf, make sure you sign the e-file authorization form.
Avoid Costly Penalties By Filing On Time
Waiting until the last minute to file your taxes can result in filing late, in which case a late penalty will be imposed. A lot goes into preparing taxes, you need time to insure that all of the information is accurate. Last minute filings are often fraught with mistakes, and can short change potential deduction strategies, costing you more. Start planning for you taxes ahead of time and file early. The IRS usually starts accepting returns on January 15. If you cannot file before the deadline of April 15, file an extension. Keep in mind, that even if you aren’t prepared to file your tax return, you tax bill is still due on tax day. In the event that you cannot pay, file on time, and contact the IRS to set up an installment plan.
Missing Credits and Deductions
Missing credits and tax deductions is probably the most painful tax mistake. Tax credits and tax deductions are both designed to help lessen your tax bill. Tax credits work to lower the amount you owe dollar for dollar. An example of a tax credit that may be available to digital marketers, is the R&D tax credit. This tax credit was designed to incentivize businesses to invest in creating and improving technologies and processes. For example, as a digital marketers, if you spend time and resources developing new API’s the money you spend in research and development could qualify you for the tax credit. Learn more here.
Tax deductions also work to lower your tax burden by lowering your adjusted gross income. Thereby reducing your tax bill. Many ordinary and necessary business expenses qualify for tax deductions. Some common tax deductions include: marketing expenses, office supplies, travel expenses, and operating costs.
The mistake lies in leaving money on the table by not claiming all the tax credits and deductions that are applicable to your business. Talk to your tax advisor about which tax credits and deductions are available to you.
Preventing Tax Mistakes
Getting your taxes right the first time is a lot better than having to revisit them. However, in the event that you catch a mistake, you may be able to file an amended return. This can be done by filing a 1040x. You have 3 years from the date your filed or 2 years from the date you paid, and in some state 4 years, to amend a tax return. You may want to consider filing an amended return if you discover you missed a tax credit or tax deduction, in which case you could stand to save money.
Like we mentioned above, it is best to get your taxes right the first time. Go over your taxes with a fine toothed comb to catch any mistakes before you file. Having a good accounting process set up can also make a huge difference. This helps you stay organized throughout the year. Select a reliable and capable accounting software program like Quickbooks Pro or Xero. Either, can help you keep track of expenses and income accurately and efficiently.
Selecting the right accounting professional is also crucial. Work with someone who can help you with your accounting process, tax planning, and tax preparation. Someone who knows your industry is also a bonus. You should feel comfortable asking them questions. When it comes to taxes, knowledge is power. Failure to stay up to date on the latest changes, is no excuse for not filing your taxes. At least by working with a professional, you have someone who knows the tax code for you and can help educate you.
To get a second opinion from our firm, connect with us here.