Self-Employed in Tennessee? 7 Tax Mistakes That Can Cost You Thousands

Running your own business gives you freedom, but it also means you are responsible for keeping up with taxes throughout the year.

At Tax Services of Tennessee, we often work with self-employed individuals and small-business owners who are surprised by how much they owe at tax time. In many cases, the problem isn't that the business owner did something terrible. It's that nobody explained what they should have been doing during the year.

Here are seven common tax mistakes self-employed taxpayers should watch for.

1. Treating Every Bank Deposit as Business Income

If you deposit money into your business account, that doesn't automatically mean it is taxable sales.

Your bank account may contain:

• Customer payments

• Transfers between your own accounts

• Loan proceeds

• Refunds

• Personal money contributed to the business

Good bookkeeping means identifying what the deposits actually represent rather than simply adding every deposit together and calling the total "sales."

This is especially important when preparing a return from bank statements.

2. Forgetting About Estimated Tax Payments

Employees normally have federal taxes withheld from their paychecks. Self-employed taxpayers generally don't have that automatic withholding.

Depending on the circumstances, a self-employed taxpayer may need to make estimated payments during the year for both income tax and self-employment tax. The IRS divides the year into four estimated-tax payment periods, and paying too little by the applicable deadlines can result in an underpayment penalty. (IRS)

Waiting until tax season to think about taxes can result in a very unpleasant surprise.

3. Missing Legitimate Business Expenses

Small-business owners sometimes remember the big expenses but forget dozens of smaller ones.

Depending on the business and circumstances, expenses might include things such as advertising, supplies, insurance, professional fees, software, business telephone expenses, equipment, merchant fees and other ordinary business costs.

Those smaller expenses can add up substantially over an entire year.

The key is maintaining records and separating legitimate business expenses from personal spending.

4. Not Tracking Business Mileage

If you drive for business, mileage can be an important tax deduction.

But don't wait until tax season and try to reconstruct an entire year's driving from memory.

Keep good records throughout the year showing your business driving and business purpose. The IRS publishes a standard business mileage rate each year, and the applicable rate can change. (IRS)

5. Mixing Business and Personal Spending

Using the same checking account and credit cards for everything can turn tax preparation into a mess.

You may have groceries, plumbing supplies, restaurant charges, advertising, family purchases and business equipment all mixed together.

A separate business checking account and dedicated business credit card can make bookkeeping much easier.

It also makes it easier to see how your business is actually performing.

6. Assuming a Loan Is Business Income

This is another area that can cause confusion when reviewing bank deposits.

Borrowed money generally isn't business sales just because the lender deposited the money into the business bank account.

Loan proceeds and the repayment of that loan need to be properly identified. The tax treatment of interest, fees and principal is different, so don't simply categorize the entire loan payment as a business expense.

Keeping the loan documents and year-end statements can make tax preparation much easier.

7. Waiting Until Tax Season to Find Out How Much You Made

This may be the biggest mistake.

A business owner shouldn't have to wait until February or March to discover whether the business made $30,000 or $100,000.

Reviewing your income and expenses throughout the year gives you an opportunity to identify missing records, plan for estimated taxes and make better business decisions.

The IRS specifically notes that taxpayers can recalculate estimated taxes during the year when their expected income changes. (IRS)

A Little Organization Can Make Tax Season Much Easier

If you're self-employed, don't throw everything into a box and hope for the best at tax time.

Keep your bank statements.

Keep your credit-card statements.

Track your mileage.

Save receipts for significant purchases.

Keep loan and financing documents.

And know approximately how much your business is earning throughout the year.

Good records can make the difference between guessing at a tax return and preparing one based on documentation.

Need Small-Business Tax Help in Middle Tennessee?

Tax Services of Tennessee works with self-employed individuals and small-business owners who need help organizing their records and preparing their tax returns.

We serve clients throughout Columbia, Spring Hill, Franklin, Brentwood, Nashville and surrounding Middle Tennessee communities.

Call Tax Services of Tennessee

615-933-8292

Tax preparation • Small-business taxes • Self-employed returns • Prior-year returns • IRS tax issues

Tax situations vary. The deductibility of an expense depends on the facts and circumstances and applicable tax law.

This one gives you a natural way to talk about the exact kind of work you do for small-business clients—bank statements, credit cards, loans, mileage and finding legitimate expenses—without mentioning any particular client.