As a small business owner, do you think you can do your tax preparation by yourself? Is it a wise thing to do? Well, the answer to this question is “YES”, you are permitted to file your tax returns. The IRS doesn’t mandate business owners to hire a tax expert to prepare their tax returns.
Despite this, the majority of business owners choose to have tax professionals prepare their tax filings. In fact, most business owners employ tax preparers. However, you must not follow the same trend.
Is There A Benefit To Doing Your Own Taxes?
For small business owners, there are some benefits to doing your own taxes. However, as your business expands, you should hire a small business tax preparer to handle that aspect, to enable your focus on productivity. We will discuss those benefits as you read on.
Firstly, the main benefit is that you will save money by preparing your taxes yourself instead of hiring an expert. An average tax expert in the US charges at least $500 for tax preparation. This could be higher, depending on the complexity of your business.
Although, the fees for your business tax preparation are deductible business expenditures. However, this deduction will only cover a portion of the total expense. Your top tax rate will determine how much.
Furthermore, the costs you incur for filing your personal taxes are not tax deductible. If you use a tax expert to handle both your personal and corporate taxes, ask for a separate invoice for the latter because the amount is deductible.
The second benefit of filing your taxes by yourself is that you will become familiar with the tax laws in your country and their impact on your profit. This will give you a better insight into the expenses that are deductible and non-deductible. In addition, you will think of ways to reduce your tax liability in the coming years.
Why You Shouldn’t Do Your Own Tax Returns
There are advantages and disadvantages to almost everything. Even in tax filing, there are several reasons why you shouldn’t prepare your taxes yourself.
The most important reason to avoid preparing your taxes by yourself is that it consumes time. Perhaps it would be preferable for you to spend this time working on improving your business.
Furthermore, filing your taxes yourself will make room for errors. You might make the mistake of paying less tax than you own, which will get you into trouble with the tax authorities.
It’s also possible that you’ll pay more than is required by the law. The IRS won’t bother you in this situation, most certainly.
The problem which you might face from the IRS for filing wrongly will be more than the cost of hiring a tax pro. To be on the safer side, why don’t you just hire a small business tax preparer?
If you are managing a new business, I advise that you hire a tax expert to file your tax in the first year of operation. Then, you can follow their returns as a template to prepare your own taxes in subsequent years.
Which Business Tax Returns Should You Prepare Yourself?
It’s okay to file your business taxes yourself if you run a sole proprietorship business. A sole proprietorship business, also known as a one-man business, is owned and managed by one person for profit-making. Furthermore, the tax treatment of a sole-owner limited liability company is typically the same as that of a sole proprietor.
As a sole proprietor, you must file a personal tax return with the income and losses from your business. (IRS Form 1040). In the event that you make a profit at the end of the period, you must add it to other income, such as interest income or the income of your spouse if you are married, and the total is subject to taxation.
When you’re a sole proprietor and you do your own taxes, you’ll need to submit a few extra forms along with your personal return. These comprise:
- Form SE: To report and submit your self-employment taxes, you must prepare IRS Form SE with your tax return. All self-employed people are required to file IRS Form SE because they are Medicare and Social Security taxes.
- Schedule C: To show that your business made a profit or loss, you must file IRS Schedule C with your individual tax return. You will list all of your business revenue and tax-deductible expenses in this form. Schedule C is rather easy to fill when you keep thorough records of your income and expenditures.
- Other forms: You might need to submit additional forms along with your tax return depending on the business deductions you claim. For instance, to claim the home office deduction, you must include IRS Form 8829, Expenses for Business Use of Your Home, together with your tax return and explain how you arrived at the deduction.
Avoid Preparing These Types Of Tax Returns Yourself
You shouldn’t prepare your business tax return yourself if you own a multi-owner LLC, a corporation, or a partnership business. These businesses are expected to file their tax returns themselves. Moreover, they may become challenging.
Partnerships, S corporations, and multi-member LLCs must file separate business tax returns, in addition to creating a statement on Schedule K-1, which shows the profits or losses of each owner.
Use Tax Preparation Software
Nearly all taxpayers today who prepare their own tax returns do so using tax preparation software. Only 10% of taxpayers manually complete their tax returns. There are different advanced tax preparation software in the market for business owners. However, the most popular are Tax Act, H&R Block, and Intuit TurboTax.
Such software is available in versions for sole proprietors. They consist of H&R Block Self-Employed/Rental, TaxAct Sole Proprietor, and TurboTax Self-Employed.
You can complete your tax returns through this software by answering a few questions. All required forms are generated automatically and verified for accuracy. There is online support for users to ask questions or solve any issue that may arise during the process.
Self-prepared returns using software, however, are not always accurate. Garbage in, garbage out is an adage that always holds true. Without a doubt, using tax preparation software for businesses is significantly less expensive than using a tax expert. Furthermore, the cost is tax deductible.
Do Self-prepared Tax Returns Have Higher Audit Rates?
When you file your own tax return, the IRS is always aware. This is obvious since if you hire a tax expert, he/she must sign the tax return you submit to the IRS. You must disclose the identity of your tax filer, especially for individual IRS Form 1040, Form 1065 and Form 1120.
According to some tax professionals, tax returns of businesses that prepare their own taxes are more likely to be audited by the IRS than those filed by a pro. They claim that when business owners prepare their taxes themselves, there is a high chance of fraud.
Reputable tax preparers won’t knowingly permit business owners to file false tax returns. However, if you prepare your own tax return, you are free to make any claim. Self-prepared returns, however, can be audited more frequently simply because they have more errors than ones filed by tax experts.
Tax filing is an important process in maintaining the financial health of a business. However, small business owners who want to cut costs and overhead might be wondering if they can file their business tax return themselves. Yes, they can. But they should do so after fully understanding the potential repercussions of filing their taxes without a tax preparer.
Those who opt to independently file a small business’s return ought to think about the penalties of a mistake.