Starting a small business is an exciting venture. But when April rolls around, the term “business tax” can instill fear in even the most rigid entrepreneur. You wear many hats when operating a small business, including accountant, but keeping up with the current tax laws and codes can be a daunting task.
But doing your small business taxes isn’t something you should simply sweep under the rug and forget about. Did you know that tax evasion brought Al Capone down, not murder or organized crime? Feigning ignorance about taxes isn’t helpful in anyway. Here is what you need to know about small business taxes.
Knowing Your Legal Entity
A legal entity is an association, trust, proprietorship, or person that has legal standing in the eyes of the United States and can enter into agreements, pay and incur debts, sue or be sued, and also be held accountable for its actions.
A small business can choose a variety of legal entities to distinguish itself as, including an LLC, partnership, S corporation, and sole proprietorship. But selecting a legal entity can greatly affect your tax burden. For example, S corporations allow small business owners to pay taxes at a shareholder level, rather than having to pay expensive corporate rates. It’s important to know the different tax benefits and drawbacks of legal entities before picking one for your small company.
Deducting Small Business Expenses
As a new small business owner, you’re always seeking to get the most bang for your buck. You’ll be happy to know that there are many tax deductions associated with running a small company. From a home office and lunch meetings to qualified production activities and insurance premiums, you may be able to deduct a large number of your business expenses to minimize your tax burden while making the most of your business profits.
You can deduct expenses deemed both necessary and ordinary. Necessary expenses include expenses which are helpful but aren’t always obligatory to your company while ordinary expenses are common to your business’s specific industry.
One easy deduction you can make is your home office any anything related to that space, such as repairs, utilities, and mortgage interest payments.
Don’t forget to write off your startup expenses! The IRS actually allows small company owners to deduct a huge array of startup expenses before they open their doors, including analyzing and marketing expenses.
Keep Thorough Records
It’s vital to keep accurate and thorough records throughout the year to guarantee that your tax return is correct. If you don’t keep records, you could be putting your company, and yourself, in harm’s way. There is affordable accounting software, such as QuickBooks and Track Revenue, that you can purchase that is extremely intuitive and easy to use so you don’t have to go through the trouble of keeping your records up-to-date by hand.
Part of the record keeping process is also keeping close tabs on all business receipts. They help to establish a financial dashboard of how you spend your money during the year and many receipts can be written off.
If you’re a small business owner, you need to make quarterly estimated tax payments throughout the entire year.
You’re also responsible for paying self employment tax throughout the year too. Self employment tax is made up of Medicare and Social Security taxes and is paid by a person who isn’t subjected to employer withholding.
File Your Taxes Electronically
To ensure your taxes are received in a timely manner, you should always file your small business taxes electronically. This also saves you money on sending your taxes via snail mail.
Programs such as TurboTax and H&R Block can help you seamlessly prepare and file your taxes online. Additionally, these systems can also help you get the maximum tax refunds your small business is owed.
Seeking Legal Help
If you are a small business owner who can’t afford to pay their taxes, you may be able to get temporary relief by establishing a non-collectable tax status. In order to obtain one, you must employ a seasoned team of tax attorneys to help effortlessly guide you through the process to see if you are eligible.
Launching a small business is no easy feat. And when tax season hits, you need to be prepared.
From knowing what legal entity to declare your business as to knowing what to write off, navigating small business taxes can be tricky, but it is doable.