For small business owners, filing taxes is one of the most challenging and frustrating times of the year. Since most of us are not experts in tax law, it’s stressful to make sure your tax return has filled out correctly and that you are taking advantage of all available deductions.
The life of a business owner can sometimes be overwhelmed by tax issues such as bookkeeping and tax returns. So, here are some great tips for small business taxes
Valuable Tips for small business taxes
You may not want to be around when tax season arrives. Here are some tips to help you prepare and manage your small business accounts throughout the year.
1. Separate business and personal accounts
The IRS is always on the lookout for small businesses that don’t pay their taxes. If you are audited, the first thing you should do is make sure your business and personal accounts are not mixed up.
Stephen Aldrich, the former CEO of Online Accounting Systems, told Business News Daily. The IRS looks for personal expenses that are treated as business expenses. Another tax expert told the Journal that “the IRS routinely audits certain types of small business taxes deductions, such as deductions for home office, meals, travel, entertainment, vehicle use, and property damage, to ensure that taxpayers are complying with restrictions and regulations.”
2. Small Business Taxes Credit Survey
Small business owners can take advantage of several tax credits that can significantly reduce their tax bills. Tax credits can reduce the total amount of income subject to federal and state taxes. There are dozens of tax credits, and the real challenge is determining which ones are tax deductions.
Business meals, marketing expenses, rent, travel, and other business expenses can deduct during the tax period. However, each deduction has its own rules. For example, business meals at company parties are 100% deductible, but business meals for entertainment with clients are not. Your accountant or tax advisor can verify that you deduct your expenses correctly before filing your tax return.
To maximize your tax deductions, you should itemize your deductions on your tax return. Itemized deductions take a little more time than standard deductions and, more importantly, require careful record keeping. However, the benefits are well worth the extra effort for small business taxes.
3. Year-end Capital Goods Purchases
Businesses need capital equipment, such as furniture, computer hardware and software, and leasehold improvements. If equipment needs to be purchased or leasehold improvements made, it is best to do so at the end of the fiscal year. The business can claim depreciation throughout the year, even if the asset was only used for a few weeks or months (subject to the half-year rule).
4. An appropriate combination of wages and dividends
Small business owners can receive wages in the form of salary, dividends, or a combination of all three options, all of which have advantages and disadvantages. The critical question is which combination maximizes income for each shareholder. Determining the right combination can be complex and confusing, so it’s best to consult with an experienced accountant about the balance between salary and dividend combinations.
5. Keeping proper records
- Keeping detailed and accurate records throughout the year will help ensure valid tax returns.
- If documents are inadequate, you could leave deductions unattended and, at worst, open yourself up to an audit.
- All businesses invest in a basic version of accounting software, and it’s easy to use, inexpensive and keeps track of all income and expenses.
6. Keep track of quarterly tax payments
Everyone who files a federal tax return must pay estimated taxes each quarter, except for those who owe more than $1,000. You may not realize that you have been paying quarterly taxes for a long time. If you work for an employer and file a W-4 form, the employer will calculate your quarterly taxes and automatically deduct them from your wages. You must calculate and pay these payments yourself now that you are self-employed.
If you have paid taxes for one or two years, you can use your income from the previous year to calculate the tax due. You are multiplying your average monthly payment by 12 to get a rough figure if you’re new to this. These numbers may vary, but that’s okay. They’re quarterly prepayments for a reason. However, you will get penalization if you do not pay at least 90% of the tax due for the year. There are also penalties for late payment.
The IRS provides a free resource to help you calculate your quarterly payments and make them electronically. Of course, your tax advisor can also calculate your quarterly payments for you and ensure that you meet the quarterly payment deadlines.
7. Classify your business correctly
Failing to classify your business correctly can result in an overpayment of taxes. Your choice of business classification –
- C corporation
- S corporation
- limited partnership
- limited liability company
- sole proprietorship
- sole proprietor
They all can make a difference in your tax bill. Small business taxes need to consult with an attorney or accountant to determine how they should classify their business.
8. Payroll Management
But make sure the firm has a good reputation. Some business owners hire a little-known payroll company to save money and find out that the company does not pay payroll taxes. In that case, the employer pays the payroll tax, and the IRS usually checks to see if payroll taxes have paid quarterly.
Tax deductions are a great way to minimize your tax bill, and good record-keeping can help you keep them when the IRS comes to you. Above are some of the great tips for small business taxes that you must know.
Villie Walters Ramirez is a 32-year-old tax consultant nyc at a tax king who enjoys accounting and bookkeeping. She has a post-graduate degree in accounting, and she has a severe phobia of cats. She enjoys traveling A lot.