Common Errors Businesses Make in Federal, State, Taxes

1. Failing to Keep Good Auto/Travel Records

If you are using your personal car for business purposes, make sure you keep good records on business use of your car. Record your business travel expenses completely, as soon as they happen.

2. Failing to Withhold Taxes from Independent Contractors

If you pay independent contractors, you must receive a valid taxpayer ID from these individuals or companies, and you mus withhold taxes from payments if you don't have a valid taxpayer ID.

3. Treating Employees as Independent Contractors

Do you know if your workers are employees or independent contractors? You must withhold federal income taxes and FICA taxes (Social Security/Medicare) from employees, and pay an equal amount for the FICA taxes. For this reason, many businesses call workers "independent contractors" so they don't have to pay these taxes. Just make sure you are classifying these workers correctly to avoid hefty fines and penalties. If you aren't sure, you can ask the IRS for a determination by filing Form W-8.

4. Not Reporting all Large Cash Transactions over $10,000

The IRS wants to know about large cash transactions you receive in your business. Read about how to report these transactions on Form 8300.

5. Not Paying Sales Taxes When Due

Sales taxes are "trust fund" taxes. That is, they are collected by you and kept in trust until they are paid to your state. If you fail to pay back the taxes you have collected, your state Department of Revenue can add on fines and penalties. If you don't have the money, you could be in even bigger trouble.

6. Failing to Make Payroll Tax Deposits When Due

In the same way as sales taxes, you must deposit payroll taxes (federal withholding and FICA) according to the schedule set by the IRS. More fines/penalties if you fail to pay.

7. Not Keeping Business and Personal Funds Separate

From the moment you start your business, you must keep business transactions and funds separate from your personal transactions and funds. If the IRS decides that business and personal are too closely related, they could disallow the separateness of your business, and you could be jeopardizing business expense deductions and putting personal assets at risk.