Even professional tax accountants have a hard time making sense of the tax code, and it’s even harder for uninitiated freelancers and gig-economy workers. You don’t need to read the tax code line-by-line to come up with an effective tax plan, but you can easily set yourself back if you screw up. Keep reading and we’ll show you how to avoid some of the most common tax mistakes.
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.
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
No one wants to revisit taxes from three years ago at the request of an IRS auditor, so you need to make sure you’re following all the rules. First and foremost, you should avoid making these common tax mistakes.
Miscalculations
Discrepancies on your tax return will definitely attract the attention of the IRS, so make sure you report every figure accurately. Take a thorough accounting of your pertinent documents to ensure your totals match what the IRS has on file. You should take particular care to review any 1099 Forms because the IRS also has copies of these documents and they’ll immediately notice any discrepancies.
Omitting Income
The IRS expects you to report every cent of your earnings, including W-2 wages and 1099 income. If you receive any 1099 Forms, accurately report the income on your tax return as a gross receipt. The IRS already has your 1099 forms on file, and they’ll automatically flag your return for a review if they notice any difference.
1099 Discrepancies
Most freelancers and gig economy workers get 1099 forms that list their income for the year. However, some businesses may also receive 1099-K forms from third-party payment processors like PayPal, Amazon, or Shopify. Like regular 1099 forms, 1099-k forms only list gross revenues, and they don’t account for platform fees, commissions, or taxes.
You will still get credit for paying transaction fees, but you must declare the gross income on your return separately. First, list your gross earnings as income on your tax return. Then, calculate your total platform costs and list them as a deduction under ‘commissions, fees, and adjustments.’
Your tax return should reflect the total of all your 1099 income. If your figures don’t match the IRS’s totals, you will probably get a notice of proposed adjustment in the mail.
Misreporting 1099 Income
Make sure you list 1099 income under the correct tax payer ID, or the IRS could flag it as missing income.
For example, your S-corporation receives a 1099 Form for $100, but it’s listed under your personal social security number. In this scenario, you should list the $100 income under your personal income. If you lump this personal income in with your S-corp, the IRS will think the income is missing and will investigate the discrepancy.
To correct this error, you need to recognize $100 of income on your personal return to acknowledge the 1099 earnings. Then, deduct it from your S-corp income to balance the difference. This will not impact your overall tax filing, but it will help you avoid potential trouble with the Tax Man.
Issuing 1099 Forms Late
You need to issue 1099 forms for every contractor you paid more than $600 during the tax year. IRS regulations require you to issue these forms before Jan. 31, so your 1099 contractors receive the forms well in advance of the April 15 deadline. The IRS will disallow contactor payments if you don’t issue a 1099 Form, and that could translate to a tremendous tax cost.
Typos and Missing Signatures
According to the IRS, the most common tax mistakes are miswritten Social Security Numbers and missing signatures. Luckily, this common tax mistake is easily avoidable. It is a silly mistake that can easily be avoided. Always review your forms in detail before you mail or send them electronically.
Filing Late
Don’t wait until the last minute to file your taxes. Start preparing your taxes well in advance of the deadline to stay on top of the game. The IRS starts accepting returns as soon as Jan. 15, so you have three full months to file.
If you’re waiting on 1099 Forms, W2s, or other pertinent information, you can file an automatic tax extension to buy yourself another six months. However, you still have to pay your tax bill by April 15th.
You can set up a payment plan if you don’t have the money to cover your tax bill, but it could cost you more in interest. Even if you can’t cover the bill, make sure you file your return on time. Then, contact the IRS to set up an installment plan.
If you plan on filing an automatic tax extension or requesting a payment plan, put the paperwork in before the tax deadline or you will face penalties and fines.
Missing Out on Credits or Deductions
Making this tax mistake could greatly increase your overall tax bill. You want to take advantage of every available tax credit and deduction so you can minimize your tax bill.
Tax credits are the most valuable because they lower your tax costs on a dollar-by-dollar basis. One of the most popular tax credits for digital marketers and freelancers is the R&D tax credit. This credit incentivizes businesses to create and improve technology and other processes. Learn more about the R&D tax credit here.
You can also qualify for numerous deductions depending on your business expenses. Some common categories of deductions include marketing expenses, travel expenses, office expenses, and equipment. Don’t leave any money on the table. Take advantage o
Falling Behind on the Tax Code
The tax code is constantly changing. New laws are being written all the time, so it’s difficult to stay up to date. Unfortunately, the IRS expects you to keep up with the laws.
If you can’t follow the latest tax code changes, you need to consult with someone who does. The experts at Tax Hack follow the tax code religiously, and we know exactly what changes will affect your business. If you have questions about tax changes, talk to one of our experts here.
How to Fix Tax Mistakes
If you make a tax mistake, don’t panic. You might be able to file an amended tax return with Form 1040X. You have up to three years from the filing date you filed, or two years from the date the tax bill was paid, to amend your tax return. In certain states, you can file an amended return up to four years later.
Filing an amended return is a no-brainer if you discover missed deductions or credits. If you think you made a similar mistake in the past three years, you should give your tax returns a second look.
How to Prevent Tax Mistakes
- Have an organized accounting system in place. Stay on top of bookkeeping tasks and maintain accurate records of income, expenses, assets, and other transactional information.
- Don’t wait until the last minute. Procrastination is the leading cause of tax mistakes. Rushing leads to mistakes, and tax mistakes can cost you a pretty penny.
- Work with a professional tax advisor throughout the year. Tax Hack can help you develop a tax plan that will minimize your tax exposure and keep your books compliant throughout the year. Our tax experts specialize in working with eCommerce vendors, freelancers, and other non-traditional businesses, so we have the expertise and experience your business needs. Click here to sign up for a no-obligation chat with a Tax Hack pro today.
Like most tax mistakes, you can avoid most of these errors by being attentive and organized. Make accounting a regular part of your day-to-day business so you don’t fall behind on bookkeeping and other important financial tasks. Most importantly, make sure you consult with Tax Hack or another qualified accountant to ensure your complying with regulations.
Click here to set up a strategy session with a Tax Hack pro now.
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