A sole proprietor is an individual who becomes self-employed. In the eyes of the IRS, he is not separate from his business and shows his business income on his individual tax 1040 form with a Schedule C and a Schedule SE attached.
Sole proprietors often make tax filing mistakes because they are busy managing the everyday mechanics of their company and do not have time to learn the ins and outs of the tax code. So with tax day just around the corner, here are three common tax filing mistakes that sole proprietors often make.
Claiming Too Much in Expenses
A sole proprietor should take every legitimate deduction that he can. The trouble comes when he claims too much, particularly in areas like automobile expenses, travel and entertainment expenses and the home office deduction.
In fact, these are the three areas that the IRS examines most closely when it comes to sole proprietors. The government knows what the average business in each industry spends in these categories and can easily spot companies with expenses outside of normal parameters.
Under Reporting Business Income
If a sole proprietor does work for another company and earns more than $600, then that company must send the sole proprietor a 1099-MISC. Even if a company does not send an 1099-MISC, the sole proprietor must report all business income on his 1040 form. This includes cash payments. If he does not do so and is audited, then he is at risk for fines and penalties. The IRS reported that in 2008, sole proprietors under reported income by $68 billion dollars.
Filing Late or Not Filing at All
Running a sole proprietorship takes a lot of time, attention and energy so it is easy to miss a tax deadline. If one slips by, it is better to file late than not at all. The longer a business owner waits to file, the more the penalties and fines add up.
Small business taxes are complicated. If it is time to get professional help, then contact us. Our experienced staff is here to assist and looks forward to working with you.