Don’t you just love taxes? We are pretty sure nobody loves taxes, well maybe we do, but then again taxes are our bread and butter.
Not only do you have to hand over a portion of your hard earned income to the IRS, but they don’t make the code easy to understand for the average business owner.
The tax code is so long it has roughly 4 millions words! The length and complexity of the tax code alone is a good enough reason to work with someone who knows it well.
However, even under the best of circumstances, tax mistakes can and do arise.
For digital marketers who own their own business, the last thing you want to do is worry about tax mistakes. Here are some tips on how to avoid the most common tax mistakes we see.
The Most Common Tax Mistakes
Tax mistakes are more common than you might think. Things get overlooked, miscalculated, lost in translation, or exaggerated all the time. When this happens it can warrant the extra scrutiny from the IRS, which lets face it, is an uncomfortable place to be. As a digital marketer you are busy, the last thing you need is to revisit your taxes at the request of the IRS, so dotting all of your i’s and crossing all of your t’s is important to prevent mistakes in the first place. Here are some of the most common tax mistakes.
Hey we get it, not all of us are math wizzes, and miscalations can happen. But when it comes to your taxes, this can land you in some hot water. Take your time, and make sure you have gathered all of the pertinent information. Slow down and double, even triple check the numbers. E-filing is a good way to avoid any unnecessary miscalutions, and most tax software is good at catching any mathematical mistakes for basic returns.
If you are taking the itemized deduction, a business tax credit, or need help calculating the 199A deduction, then it may make sense to have a professional give a second opinion on what the tax software says. You’d be surprised how many times we’ve had to call out software provider to have them push through corrections to their auto formulas. The punchline is: get a second opinion.
The IRS wants all of your income reported, which includes any W-2 wages and 1099 income. If you receive a 1099, which a lot of businesses like digital marketers do, you will want to accurately report the income in gross receipts. 1099 income can sometimes get swept under the rug, but just know that the IRS gets a copy of your 1099 as well, so by omitting it, you flag yourself for review.
For certain companies who handle e-commerce sales or invoice through platforms such as Bill.com or Paypal, this will be particularly important since you’ll get 1099-K’s. 1099-K’s are issued for platform sales (Amazon, Shopify, etc.).
It’s important to note the 1099-K’s will reflect gross revenues not what is paid to you. For that reason, you’ll need to report the gross transaction volume on your tax return then deduct any commissions, fees, and adjustments paid to the platform.
It is critical that gross revenues on your tax return at least match the sum of all 1099’s received (if not be greater than the sum of all 1099’s). Being at a number less than the 1099’s (even if it reflects what was actually paid to you), will result in a notice of proposed adjustment. At Tax Hack Accounting Group, we provide a sensitivity analysis when reviewing all tax information received.
As you can see in the screenshot above, the 1099 total of $1.2 million far exceeds what was actually deposited in Net Sales of $873,523. However, on the tax return, we would match the 1099 number and reflect the differences as deductions.
Making sure that 1099’s are provided to the right party also triggers review. For example, if you have an S-Corporation but receive a 1099 for $100 in your Tax ID, then you would need to personally report $100 of income. Often times, marketers will “lump” their revenues together putting that $100 with the other S-Corporation return. This will trigger the IRS to catch “missing” income. To avoid this, you would need to recognize $100 of income on your personal return to acknowledge the 1099, and then a deduction of that amount to the S-Corporation so that you net out to $0. The tax consequence is the same but the necessary step is taken to avoid confusion with the Service.
The best way to avoid that is to update the Tax ID’s with all your clients and vendors to reflect the correct filing entity.
In addition, if you are required to issue 1099’s, you will want to make sure you are issuing them on time before Jan. 31 in order to claim the deductions for the 1099 contractors payments you’re making. The IRS can and will disallow contactor payments where a 1099 was required and not issued. Learn more about issuing 1099’s here [Hyperlink].
Not Double Checking Numbers and Signatures
According to the IRS,one of the most common tax mistakes is mistakes with the Social Security Number. This can happen if you are in a rush or filing late. It is a silly mistake that can easily be avoided. In addition, missing signatures are also common. A tax return that isn’t signed is considered invalid so make sure you sign it if you’re paper filing. If you are having a tax firm file on your behalf make sure you sign e-filing authorization forms.
Filing late is another common tax mistake that is completely avoidable. Don’t wait till the last minute. As you can see there are several considerations and checks that go into preparing a tax return. Waiting until the last minute may feel more efficient, however, it will short change many deduction strategies available to you and lead to additional mistakes that could otherwise be preventable. Start planning your taxes ahead of time, and get an early start, the IRS usually starts accepting returns on Jan. 15. If you are waiting on information, file and extension. Keep in mind, that even if you file an extension, your tax bill is still due on tax day, which is usually April 15. Also if you cannot pay your tax bill, make sure you file on time anyways and contact the IRS to set up an installment plan. This can help you avoid unnecessary fines and penalties.
Missing Credits or Deductions
This tax mistake might hurt your pocket book the most! There are a lot of tax credits and tax deductions designed to help taxpayers lower their tax bill. Tax credits help lower your tax bill dollar for dollar, a great tax credit that may be available to digital marketers is the R&D tax credit, which is designed to incentivize businesses to invest in creating and improving technology or processes. Learn more about this tax credit here.
In addition, as a digital marketer, you have a lot of ongoing business expenses that do qualify as deductible expenses, for example: marketing expenses, travel expenses, office expenses, and equipment to name a few. For a complete list of tax deductions click here. The point is you don’t want to leave money on the table by not claiming perfectly good tax credits and deductions that are applicable to your business. Talk to you tax advisor about which tax credits and deductions are available to your business.
Not Staying Up To Date On The Latest Tax Changes
The tax code is constantly changing. New laws are being written all the time, which can make it difficult to stay up to date. However, not staying up to date is not considered a good excuse to be delinquent on your taxes or make tax mistakes as far as the IRS is concerned. It is your responsibility as a taxpayer to stay up to date on the latest or hire a professional who does. We recommend the latter, as a good tax advisor is worth their weight in gold and can help educate you on the rules and laws that apply to your individual tax situation.
What You Can Do To Fix Tax Mistakes Or Get Taxes Back
If you stumble upon mistakes, don’t panic. You may have the ability to amend your tax return. This can be done by filing a 1040X. You have 3 years from the date you filed or 2 years from the date you paid to amend your tax return and in certain situations, you may have 4 years (for certain states). You’ll certainly want to do this if you’ve left money on the table by, for example, missing the R&D tax credit if you qualify.
Tips to Prevent Tax Mistakes
It is always good to catch mistakes beforehand if possible. However, prevention is going to be your best line of defense. While accidents do happen, you can eliminate a lot of mistakes by:
- Having a good accounting system in place, this means staying on top of your bookkeeping and maintaining accurate and organized records of income, expenses, assets, cashflows, etc..
- Work with a tax advisor throughout the year. We say it all the time, taxes don’t begin and end with tax season. Tax planning should take place all year long, under the proper guidance of your tax advisor.
- Ask questions. Knowledge is power, ask questions about things you are unsure of, so that you are aware of the tax laws that affect you.
- Don’t wait until the last minute. Procrastination is the leading cause of tax mistakes. Rushing to meet the deadline and then failing to provide accurate information can be costly.
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